Interview with Verkkokauppa.com’s Head of Investor Relations Marja Mäkinen

For those who have not heard of Verkkokauppa before, could you tell us more about your business, what you do, and what markets you’re active in?

Verkkokauppa.com is Finland’s premier online retailer, offering an extensive assortment of products ranging from home technology to hobbies and business essentials. Founded in 1992, we are among the world’s earliest online stores – our operations seamlessly integrates an online platform with four physical megastores located in Finland’s growth areas, delivering a comprehensive omnichannel customer experience. We employ approximately 600 staff members and our website attracts over 80 million visits annually, with online transactions accounting for 60% of our total sales. Consumer purchases contribute to 70% of our revenue, while the remaining sales are split between B2B clients and about 7% in international sales, akin to wholesale trading. Notably, more than 90% of our sales are generated from customers within Finland.

Can you tell us more on why you have adopted an omnichannel approach and the main advantages of it?

We originated as an online business, which is a key competitive advantage because our operations are inherently designed for the digital marketplace. Our four megastores complement our online presence, ensuring that the entire shopping experience is cohesive. Typically, customers start their journey on our website, where they can compare products, prices, and sellers. Many then visit our stores to further evaluate products based on their specific needs before ultimately placing their orders online and sometimes opting to collect their purchases in-store.

This hybrid approach allows customers to interact with products both virtually and physically, purchasing from the convenience of their location and picking their order up at their convenience. While our online inventory is more extensive, our stores still carry a significant selection of products. Moreover, we are the only retailer in Finland offering one-hour delivery directly to customers’ doorsteps, available 24/7 to approximately 700,000 customers in the Helsinki area – we achieve this remarkable service level through advanced automation and robotics.

Can you tell us a bit more of your offerings and how you stand against competitors?

We offer a diverse range of approximately 70,000 products, categorized into core categories such as IT, entertainment, mobile devices, and both small and major domestic appliances, categories that have been a foundation to our offerings since inception. Additionally, our assortment includes products for home and gardening, barbeques, home decorations, toys, and various sports activities.

Our main competitive advantage is the curated assortment as well the fast delivery. Uniquely in Finland, we provide one-hour delivery for nearly 30,000 items in our assortment, available 24/7 throughout the capital region. We are actively expanding this service within the year. Currently, over a quarter of all orders in this service area opt for express delivery, a trend that is gaining popularity. Our goal is to be the go-to shopping destination at any time of day, offering the interesting assortment with the fastest delivery times, which stands as our competitive edge.

Our operations focus on delivering a fast and convenient customer experience at low operational cost. Our systems are data-driven and highly automated, optimizing our internal logistics. Originating as an online business, our operations are specifically designed and automated to support this model, ensuring efficiency across all functions. This automation is key to providing the best customer experience, characterized by rapid delivery times as we continue to enhance the online shopping experience. By doing this, we are accelerating the online transition within shopping.

Recent initiatives include significant upgrades to our online store last year, the most substantial in our company’s history, to better support our wide product range and rapid delivery capabilities. We’ve also introduced new services, such as a fully digital trade-in service for electronics like phones, computers, and tablets, which not only facilitates recycling but also extends the lifecycle of these devices. Customers can trade in their used devices for a refund, usable in our stores. These new services are tailored to meet evolving customer needs and demands, reinforcing our commitment to convenience and sustainability.

Could you elaborate on how Verkkokauppa is accelerating the online transition?

Within our core categories, the market isn’t growing as fast as it has done, however, the transition is taking place, meaning that the online segment is continuously growing. Customers has also started to transition to other items such as the specialty trade online as well. Therefore, there is a lot of room to grow the online store within these items. Especially now when they have experienced a very comfortable way of doing online shopping when all the aftermarket services and warranties functions very fluently making it easier to accelerate the transition, which is an example to the growth to in the online market. 

What is the company’s strategy regarding growth and improving profitability going forward?

At the end of last year, we unveiled an updated strategy aimed at driving profitable growth at a pace faster than the market. Our goal is to establish a new standard for purchasing and ownership, incorporating innovative services like trade-ins and rapid delivery as mentioned earlier. A key element of our strategy is to expedite the shift to online shopping by making the process smoother, easier, and quicker. We plan to provide  a full product range with the best availability in selected categories and to expand the range of high-quality own brand products as well as enter new markets to achieve this. Introducing new services is also crucial to our growth strategy, which is closely tied to enhancing profitability.

Moreover, we are committed to increasing automation and refining our operations and platform, which are expected to further improve profitability. Our strategic period concludes at the end of 2028, with the targets of growing faster than the market by over 5 % annually and achieving an annual operating profit margin of over 5 %. Additionally, we aim to reduce
fixed costs to less than 10% of revenue by leveraging higher volumes. Thus, our approach to growth and profitability is deeply interconnected.

We initiated our strategy at the end of last year and are currently exploring and evaluating new markets. This exploration does not necessarily imply acquisitions, instead, we are considering partnerships abroad. For instance, we have been conducting tests with CDON in Sweden. Our strong sourcing unit in Asia positions us well to offer our own products on platforms like CDON and other markets. Also, we are working on new profit models, like Retail as Media, mentioning one example. We are actively working on these initiatives and will provide updates as soon as we have developments to share. Additionally, we have a Capital Markets Day scheduled for the end of May, where we hope to offer further insights into these endeavours.

Can you tell us a bit more of how Verkkokauppa has been affected by the macroeconomic downturn that has swept across Europe, what measure has been put in place to counter it and when you see the cycle turning?

Since 2022, the Finnish economy has experienced an economic downturn, with consumer confidence and market conditions deteriorating significantly. Inflation and economic uncertainties have eroded consumer purchasing power. In response, we initiated a profitability improvement program last year to enhance our operational efficiency and bolster competitiveness amid this challenging economic environment.

The program was designed to optimize our product assortment and increase the efficiency of our inventory management, supply chain operations, and organizational structure to better align with our strategic goals and adjust staffing and expenses to match current market demands. As a result of this initiative, we achieved our targets last year, enhancing our profitability. Our efforts to reduce our cost base and inventory levels to sustainable figures significantly boosted our cash flow.

We have identified that consumer interest rates are the primary factor affecting purchasing power. Economists now expect interest rates to decrease over the summer, which should ease market conditions in the latter half of the year. Consequently, we are bracing for a challenging first half of 2024, given the sluggish market, intense price-driven competition, and highly price-sensitive consumers who are inclined towards discounts.

However, our strategy prioritizes securing profitability over merely boosting sales volumes. In line with this approach, although our sales declined in the first quarter, we successfully maintained our profitability and are ready for when the market starts to improve.

Where do you see the company in three years time?

It depends on the market conditions and how the economic situation will change, therefore, the outcome will be influenced by market conditions and economic shifts. As it stands, we are

the market leader in Finland, and we hope to have further solidified this position. A critical aspect of our strategy is our fast delivery service. I envision expanding our one-hour home delivery to encompass a broader area of Finland, making it accessible to more customers and enhancing their shopping experience with us.

Could you tell us three reasons for why Verkkokauppa is a great investment today?

• We have adapted and enhanced our operations to align with current market fluctuations and demands. Our focus on intralogistics, automation, and robotics ensures we’re well-prepared for a market rebound. Additionally, we’ve identified significant latent demand among customers who have extended their electronics replacement cycles, which we expect to convert into sales as market conditions improve. A key advantage of ours is our online origins, allowing us to develop an operating model that’s inherently cost-efficient from the start. With only four physical stores compared to competitors who may have 60-70, our cost structure is therefore fundamentally more streamlined.
• At the core of our business philosophy is a commitment to meeting customer needs, not just driving sales or profits. This approach fosters strong customer relationships and loyalty, which are crucial for long-term success.
• Financially, we aim to distribute 60-80% of our annual net profits in the form of quarterly growing dividends, aligning our success with shareholder returns.