Kesko grocery: where to find growth?

Kesko grocery has come at a crossroads. Its counterpart, the DIY business, has become a growth engine for the Kesko Corporation.

With rapid internationalisation, the DIY business is growing and becoming ever more important for Kesko. Since 2019, DIY has taken a bigger share of both the revenues and profits of the Kesko corporation.

On the other hand, the food business has abandoned its international businesses and focused on the Finnish market.

In the short term, this has been a good choice. The pandemic accelerated the growth and profitability of the grocery business. However, in the longer term, the grocery business in Finland cannot be regarded as a high-growth business, especially if one compares it to the DIY business, which has expanded to several countries in Northern Europe.

The grocery business already has a 35+% market share in the market, where two big retailers dominate over 80% of all groceries sold.

Thus, the grocery business does not really have a significant upside to growth in Finland. It can grab some market share from the other dominant grocer, S group, which has over 45% market share. However, that will be very difficult and expensive as S-group is structurally more efficient and better positioned to compete with price.

This leaves Kesko to focus on the higher-end consumers. That is understandable but not a very good place for a giant with nearly 40% market share. There aren’t enough customers to sustain the high market share.

So the big question is: where does Kesko grocery get its growth in the future?

In Sweden, ICA (“the big brother of Kesko grocery”) did their calculations and decided to take the company private. This is smart in many ways. This way, ICA does not have many of the burdens and expenses related to being a public company. The most important benefit is that there is no need to generate profits for external shareholders.

This means that the entrepreneurs have more leverage to compete in price or be more profitable.

Growth: from where?

For Kesko groceries taking the company private is not a realistic option in the short term. However, one part of the business could become an international growth engine: the foodservice wholesale market leader in Finland, Kespro.

For a long time, Kespro was considered a small side business (now with more than one billion euros in revenue) alongside the big B2C grocery chains. Kespro does have a bigger influence on the profitability of Kesko grocery.

As Kespro is about 15% of the entire grocery revenue, one could estimate Kespro to bring in about 20% of the profits.

Kespro could become an international restaurant wholesaler with significant growth potential. An encouraging example of that inside Kesko would be the B2B DIY arm Onninen. Onninen operates in seven countries and is responsible for almost half of the revenue for Kesko DIY. Onninen operates a more profitable business than the B2C parts (the same applies to Kespro in grocery).

Why Kespro should go international?

There are two main reasons why Kespro could go international.

Firstly, wholesaling does not have dominant players, similar to consumer-facing grocery chains.

Secondly, foodservice wholesaling is at a crossroads. The restaurant business grows rapidly in the western world as consumers keep transitioning their food spending from grocery stores.

More than 50% of money spent on food in the US is going to restaurants. At the same time, the needs of restaurants are changing with the more convenient and efficient digital tools.

Currently, few foodservice wholesalers offer advanced digital tools for restaurants. Kespro could learn a lot from the B2C part of the parent organisation.

For consumers, digital tools are, on average better than for restaurants. This is curious as restaurants need digital tools more than consumers. Contrary to consumers, the opportunity cost of not needing to go to a store is real for restaurants.

Kespro international: a more focused operation?

For international markets, Kespro would also need to reinvent its model of operation partially. In order to be competitive in new markets, it would need to be more focused on certain customer groups and operating models. With nearly 50% market share in Finland, Kespro naturally serves almost every type of restaurant.

The more focused operation would need to concentrate on online ordering and delivery straight from a centralised warehouse(s) with big emphasis on services.

Taking Kespro international, with highly efficient digital operations, could provide Kesko food with a big opportunity to become a growth company again. This internationalisation could happen either organically or through acquisitions.

The acquisition route could be beneficial in the realm of digital channels and capabilities. Especially the online grocery space has a lot of the capabilities (fulfilment and user experience) needed for a modern food service company.

More and more restaurants are in expensive locations (city centres and shopping centres). There they can't afford to have ample storage facilities. This creates a need to deliver smaller quantities and, more often, breaks the traditional model of big deliveries. Thus, foodservice customer needs start to resemble the needs of online grocery retail customers.

In terms of digital capabilities, now is an optimal time to invest or acquire as the valuations and market feelings for the channel are at their lowest.

Kesko is not the only big grocer with a wholesale foodservice arm. For example, Axel Johnson (parent company of Axfood and MartinServera) is a significant Nordic food service wholesale. The British grocery giant Tesco acquired UK's leading foodservice wholesaler Booker in 2018.

These examples underline the importance of foodservice for a grocery retailer. With the enormous sourcing and logistics volumes of the B2C business, grocers have an advantage over traditional foodservice wholesalers.

Foodservice consolidation ahead?

Logistics and sourcing are important to foodservice. Therefore, it is not difficult to see that the same consolidation that has happened in B2C groceries will start to happen in B2B foodservice wholesaling. In that process, those companies with big volumes have a strong position. A good customer experience would be beneficial on top of the volumes.

For Kesko grocery, it would be important to find growth avenues. For the B2C part of the business, this will be difficult. For Kespro, it would be significantly easier. So far, Finnish retailers have not had too many successful experiences in going international.

Let's hope that good experiences of the DIY arm of Kesko also encourage Kespro to take the big leap.