Chief Executive Officer's review

"This was a landmark year for Ocado with gross sales up 29% for the year, we have delivered on the targets set out at the flotation. We have continued our focus on improving the customer offer, which has led to a record number of customers and sales with the achievement of profitability in the final quarter. Ocado's growth continues to outpace the market."

Tim Steiner, Chief Executive Officer

Tim Steiner

Tim Steiner
Chief Executive Officer

The past year has been a year of significant progress for Ocado. In the core operations we delivered a strong set of results for 2010. Our strategy of continuously improving our market leading customer offer continued to drive sales growth which has delivered through to the bottom line. This was a tremendous achievement by all the members of the Ocado team.

Delivering gross sales growth of 29% to £551.1 million against the backdrop of a weak UK economy is a strong result. As the business grows and starts to achieve scale we are seeing the benefits of considerable operational leverage. The business achieved numerous financial milestones in the year including reporting an adjusted EBIT profit for the second half of the year and being profitable at the EBT level for the final quarter (16 trading weeks).

The UK online grocery market is still at an early stage of development. We believe the most effective way Ocado can increase adoption is to continue improving our customer offering. As in previous years, we have worked hard to improve this on many levels, including working on range, price, availability, accuracy, ease of use as well as other service initiatives.

This year we expanded our range to 21.5k SKUs from 20.5k at the end of FY09, all of which are available to customers in the whole of our delivery geography. To put this in context, we have now taken our range from being among the smallest offered in any UK supermarket three years ago to one of the largest ranges today. As we expand the capacity of the CFC further we expect to be able to offer the largest grocery range of any major UK supermarket.

A particularly important addition to our range this year has been the launch of the Ocado own-label range, which has been introduced to complement the Waitrose own-label products. It offers the Ocado customer a range that matches closely in price and quality the core own-label ranges of the major UK supermarkets. It has been a great achievement to build the team and the supplier relationships necessary to source and develop the Ocado own-label range. While it is still early days we have seen strong take-up with 64% of all baskets containing an Ocado product in the final four week period of the year. The Ocado own-label range now has over 250 products and we expect this to grow substantially in the coming years.

The launch of the Ocado range touches on another key area where we have improved this year, pricing. We have continued to invest in our price positioning over the year through both range and absolute pricing. Due to our increasing scale we managed to maintain margin while making these investments in price. We continued our commitment to match the standard prices of all identical items of the UK's largest supermarket group. As we have expanded our range, we have increased the number of Tesco Price Match items to c.7,200. We also launched "Switch and Save" which allows our customers to move to lower priced products with improved value as they check out. This year we have run more promotions than ever before, increasing the value of our service to our customers. The investments made in pricing over recent years have been recognised by the consumer and have led to a broadening of our customer base from a demographic perspective.

We also made substantial improvements this year to our customer interfaces with the aim of providing the customer with the best possible experience in online grocery shopping regardless of how they want to interact with Ocado, whether on the website, mobile phone or iPad. This year we also upgraded the website and iPhone app and launched apps on the iPad and Android mobile devices with mobile checkouts reaching 12% since the New Year.

In November we launched the new version of the Ocado website. This has been a major operation involving teams across the business from trading through to creative to IT. We have had a positive reaction from our customers and its introduction has driven an increased average spend per order. Beyond the improved customer interface the new website provides a new back end platform which will allow us to continue to innovate over the coming years.

Ocado received numerous industry awards for its customer offer, including World Etailer of the Year 2010 at the Oracle World Retail Awards. However, we are not resting on our laurels and there are many customer offer developments planned for the coming year.

SKU Count
Checkouts on Mobile devices by Month
CFC productivity (units per hour)
Delivery productivity (drops per van per week)

The customer offer improvements have led to both a significant increase in new customers using the service and an increase in spend per customer. Average orders per week increased from 70,873 in FY09 to 92,916 in FY10, and exceeded 100,000 for the first time in the week commencing 10 May 2010. As expected, average order size showed a slight decrease to £114.06 for the year. This is due to changing customer behaviour with customers continuing to increase their frequency of shop but with a slight decline in order size. We are pleased to note that we have seen the rate of decline slow over the course of the year.

Significant effort was also spent over the year on the behind the scenes projects which enable us to deliver capacity growth and customer offer improvements. These occurred in all areas of the business affecting processes, software and hardware. For example in the CFC one of the major projects was the addition of three new chill aisles. This enabled the termination of the relatively inefficient process of trolley picking for chilled goods. On the software side over 1,500 individual changes were made to our CFC systems.

As we explained at the time of the IPO, increasing the scale of the business at this rate presents operational challenges. The CFC capacity grew in line with expectations with a slight impact on productivity gains. We reintroduced a number of processes, such as trolley picking, to help cope with increased demand. This impacted CFC efficiency with units per hour ("UPH") decreasing by 2.2% to 121 UPH. As our planned capital spend is invested in CFC1 over the coming years, we expect productivity to rise substantially and the long-term target of 180 UPH remains in place. At 99% for the year, the accuracy of our offer remained at a level we believe is significantly higher than our competitors. This is slightly down on last year and we expect the capital projects planned for the CFC will improve this.

On the delivery side of the business the progress towards the long-term target is more linear and we have seen significant improvement this year.

The increasing scale combined with upgrades to the routing software and vans has led to drops per van per week ("DPV/wk") increasing by 10% to 133. In the most productive week of the year we achieved 159 DPV/wk (compared to our long-term target of 175 DPV/wk).

Outside the core operations, this has been a significant year for the business. Three major events occurred that are the building blocks for the long-term success of the business. In May, we signed a new ten year agreement with Waitrose. We were delighted to sign this agreement which is our fifth and longest contract with Waitrose. This ensures that we will continue our relationship, which is now in its eleventh year. In July, Ocado Group plc (the "Company") listed on the London Stock Exchange. This has many benefits for the Company and its shareholders but the primary benefit was to raise significant funds. These will be used to fund the capital projects required to serve the demand we expect to see in the online grocery market. In October, we reached agreement to purchase the site for a second CFC ("CFC2"); this is the most substantial capital project in the plan to more than triple the capacity of the business from 2009 to 2013.

Current trading and outlook

As we announced on 4 March 2011 our growth has continued into the new financial year seeing gross sales increase by 25% in Q1. We are focused on positioning ourselves to take advantage of the significant latent demand for online grocery in the UK. We continue to improve the customer offer, while at the same time build capacity to serve the increasing demand.