We build shareholder value by constantly developing our innovative world leading platform for our own grocery and general merchandise businesses, and those of our commercial partners. Our strategic objectives of delivering growth, maximising efficiency and utilising proprietary knowledge are intended to deliver long term value creation. We deliver our strategic objectives through a number of complementary actions applicable to each objective. Each of our objectives and actions are consistent with our focus of delivering the best possible service for our retail and corporate customers at the lowest possible cost.
- Constantly strive to improve the attractiveness of what we offer to our customers, both consumer and corporate, and broaden awareness of this to a wider set of potential customers
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- Continually improving economic and operating performance of our business model through development of technology and operational knowledge
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- Leverage intellectual property to constantly develop competitive advantages across our business to build long term shareholder value.
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Utilising Proprietary Knowledge
- For our retail customers, this is centred on the three core pillars of the proposition to customers — service, range and price
- For our corporate customers, it is embedding improvements to our retail proposition into Ocado Smart Platform
- Developing and reinforcing brand values to the appropriate customer groups, retail and corporate
- Brand strength supported by strong execution for existing customers
- Operating efficiency — optimising fulfilment and delivery operations, measured using appropriate KPIs
- Capital efficiency — lowering the capital costs of operating full service online grocery operations, improving our own economics and enabling us to offer our platform at attractive prices
- Continually improving the technology we use through constant innovation
- Using the developments of our extensive technology and engineering teams to improve our end-to-end process used in our own retail business and our platform
- Formulating the right commercial platform proposition to add significant value for partners
- Ensure new innovations used in our retail business are embedded into our platform for partners
See the KPIs that measure the success of our strategyKPIs
1. Driving Growth
We believe that our growth is driven by the quality of the proposition provided to our customers. This is equally applicable to our retail operations as to our platform business, providing our technology and infrastructure solution to other retailers to enable their online businesses.
The quality of the proposition we offer is enabled and supported by continuing technology and engineering developments across our business.
Our Retail Businesses
A positive shopping experience is critical to encouraging consumers to try our service and to return to us for future shops. Our focus remains on improving our customers' shopping experience through the quality of our service, the freshness of our products and breadth and availability of range, and competitiveness of our prices. We continue to improve our shopping interfaces, introducing new functionality and further developing our personalisation features.
Mobile has continued to grow in importance. In 2015, over 50% of all orders were checked out using a mobile device, using our latest apps and browsers.
We have continued focusing on making every shopping experience, including a customer's first time, as easy as possible by offering features such as offline shopping, PayPal login and favourites import. These help to reduce causes of friction a customer may experience when shopping, thereby encouraging customers to shop with Ocado again.
Service and Ease of Use
We strive to exceed customer expectations of our service levels, and to remain at the forefront of the market by delivering an industry leading and consistent service for our customers.
Consistent order reliability is essential for customers who expect to receive their shop on time, delivered as ordered and within a one-hour time slot of their choice. High stock availability and minimal substitutions also remain key to the customer experience. We offer customers full flexibility by offering one-hour delivery time slots seven days a week, with a wide number of slots available from 6am until 11.30pm. Next day delivery is available to all customers , with same day delivery slots in some of our catchment areas.
We have always operated our own delivery fleet, as we feel this is a part of our service too important to contract out to third parties. We pride ourselves in having our own Customer Service Team Members with strong customer service skills and our own fleet of delivery vans.
Our operating model, combined with our proprietary optimisation software, underpins what we believe to be market leading reliability, with 95.3% on time deliveries and 99.3% order accuracy.
Convenience and the ease of using our service is key in developing a leading online proposition to our existing and future customers, which we enable through our easy to use interfaces including our latest mobile apps.
Breadth of Range and Quality of Products
We have continued to broaden our product range across different price points, providing customers with a wide choice of products suitable for their respective spending patterns and taste. In particular, our Ocado own-label products continue to be popular with our customers. We continue to offer our customers the widest range of branded and private-label products, with 47,000 SKUs available at Ocado.com, which we believe is the most extensive grocery range in the UK today.
Our operating model and CFC sites allow us to expand our product offering easily with limited stock-holding exposure, therefore allowing us to stock many specialist and niche lines alongside everyday favourites from a wide variety of small, medium, large sized and speciality suppliers who may struggle to get shelf space in a conventional supermarket. Our wide range drives loyalty and spend as customers can fulfil their weekly shopping needs in one store, and encourages supplier support as they see growth in sales of their products.
As well as breadth of range, our customers seek the freshest products possible. Our centralised operating model enables us to have stock delivered by our suppliers or wholesalers directly to our CFCs, often followed by delivery to our customers on the same or the next day, thereby removing several stages of the typical grocery supply chain. This enables us to guarantee the product life of our fresh food, which gives our customers confidence that their groceries have a minimum remaining life when delivered. We also strive to minimise waste in our business and help customers organise their food consumption by listing product use-by dates on customers' receipts.
Our model has enabled us to expand into general merchandise categories as well as dedicated specialist online stores, such as our pet store, Fetch, and our kitchen and dining store, Sizzle. Each of these stores carries extensive ranges including products not typically available in supermarkets.
We plan to launch additional destination sites in the future to offer our customers even more variety and convenience of shopping. The next such site will be our premium beauty business in partnership with Marie Claire, which we expect to launch during 2016.
The aggregation of scale into larger facilities, automation of many processes and the application of proprietary technology, has enabled us to build a strong operating model which removes cost and drives efficiency across all processes. These efficiency gains allow us to offer our customers competitive pricing. We also continue to offer market leading promotions in close collaboration with our suppliers. We introduced the UK's first grocery market price matching initiative in 2008 and continue to remain price competitive against the market leader. Our fully transparent price matching communication to our customers reinforces confidence in our competitive pricing position.
Our Platform Business
As we build our capabilities in our retail proposition, these are embedded into our platform which we offer to corporate customers. This enables our existing and future corporate customers to benefit from our innovations and technology, and furthermore the ability to offer ever better retail propositions to their own customers.
Our approach to consistently improving the capabilities of our platform to make it increasingly attractive should support long-term growth of our platform business.
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Ocado Smart Platform
Average Orders per Week
Being able to shop anywhere, anytime with intuitive and easy to use interfaces continued to be a core focus in 2015. We launched a mobile website for Ocado.com, complementing our existing mobile apps, making it easier for new and existing customers to shop when they are out and about, or even just in their own kitchen topping up their shop. Always aiming to be at the forefront of new developments, Ocado was the first online grocery app to be released on the Apple Watch, enabling a whole grocery shop to be ordered simply from your wrist.
Making shopping easier
We continued to reduce friction customers may experience when shopping, in particular for new customers, enabling customers to log in with PayPal, reducing the number of steps in our registration flow on the apps, and making it possible for customers to start to shop without the need to log in first. We have continued making the shopping experience simpler for our existing customers, for example, through making it easier for them to find a slot that suits them by comparing availability and prices across three days.
Smarter and Personal
Placing an order of over 50 items per week means that finding and choosing a product needs to be as simple as possible. We have continued to make ongoing improvements to our search engine to make it smarter to ensure that customers can find the most relevant items just for them. Providing a personalised experience has also enabled us to provide opportunities to delight our customers as we now offer free gifts to customers as they check out based on their previous shopping history.
2. Maximising Efficiency
Our objective is to provide industry leading service levels to our customers at the lowest possible cost and we continually seek to drive efficiency throughout our end-to-end operations.
The aggregation of scale into larger single facilities together with the use of automation and optimised technology allows us to drive the overall efficiency of our business. This centralised approach to fulfilment gives us several significant service and efficiency benefits.
We have continued to invest in automation and developed unique fulfilment capabilities to replace many of the manual tasks in the retail supply chain and to optimise our operations.
Our existing CFCs continue to operate at high levels of efficiency and accuracy, allowing us to provide our customers with a consistent and timely service. We expect to improve the operational efficiency – measured in units processed end-to-end per labour hour in one of our facilities – of our future CFCs even further.
Our model enables us to carry lower inventory levels, and despite our relatively high proportion of sales of fresh and chilled products at over 40% of sales, we believe we operate with the lowest product waste in the industry at 0.7% of sales across our CFCs. This is the case notwithstanding the freshness of the products we deliver to our customers and underlines one of the relative environmental benefits of our operating model.
Critical to our operations is the software that controls them. This is now almost entirely developed in-house, and cannot be bought "off the shelf" on the open market. It gives us the ability to horizontally optimise and integrate across our end-to-end solution and it enables us to collect valuable data. The in-house nature of our software development allows for rapid solutions as efficiency improvement opportunities are identified. This proprietary technology protects our business, differentiates it, and makes it more difficult to replicate.
With our existing CFCs in Hatfield and Dordon, which opened in 2002 and 2013 respectively, we operate the world's two largest and most sophisticated single pick grocery warehouses. Together with our soon to be opened new CFC located in Andover, Hampshire in the south of England and our extensive spoke network, they form a critical part of the unique end-to-end solution we have developed.
The Andover CFC will be capable of handling over 65,000 orders per week, equivalent to around £350 million of sales when operating at full capacity. This is significantly smaller than our existing CFCs, yet it will be more capital efficient than our existing capacity and will extend Ocado's total sales capacity to over £1.6 billion in 2017.
We have achieved this improved capital optimisation through the use of our own proprietary physical infrastructure solution, which we have been developing over the last few years. Our Andover CFC has the first installation of this next generation infrastructure solution. See Andover case study below for more details.
Our infrastructure solution has many important attributes, making it even more efficient and resilient than our existing CFCs. It is modular (can be built to any size), scalable (can be increased in size) and faster to deploy (shorter build and commissioning lead times). In addition, it is expected to achieve higher operational efficiency, will be more capital efficient, requires less space and can hold a large range of products. Each of these attributes is attractive in adding flexibility to our fulfilment capacity planning for our retail businesses, and for our platform business, including for Morrisons.com, offering to future partners much lower entry points for capacity commitments.
With control over the IP and the manufacturing and installation process, we plan to drive the costs down even further in the future. In February 2015, we announced plans for our fourth CFC, located in Erith to the South East of London inside the M25. The landlord started construction on this site in 2015, and we will take occupation during 2016, with first orders from this CFC expected at the end of 2017.
As with the Andover CFC, the Erith CFC will use our proprietary infrastructure and will be capable of handling in excess of 200,000 orders per week or around £1.2 billion of sales with even better capital efficiency.
Our CFCs are designed and built to handle the unique challenges that exist in picking groceries with speed, accuracy and efficiency. This complexity arises when you pick a customer order of on average around 50 items, across three different temperature zones – ambient, chilled and frozen. This and having the customer's order ready to go on the delivery vehicles in the same short time window as the other customer orders for a given van route.
Our infrastructure knowledge and solutions, combined with our end-to-end technology systems, provide an entire platform for operating online retail businesses, capable of handling the complexities and requirements of grocery retailing as well as general merchandise categories.
We fulfil customer orders through the operation of a hub and spoke network. All stock is currently stored and picked in our two existing centralised fulfilment centres (the hubs) in Hatfield, Dordon or in our non-food warehouse in Welwyn Garden City for much of the non-food range. Around one third of orders are then delivered directly from these hubs to customer homes in the local catchment areas and the remaining two thirds are "trunked" in larger vehicles to one of our 16 spoke sites, from where local delivery in one of our delivery vans takes place. Due to increased demand from existing catchments, we opened additional spokes during 2015 in Milton Keynes, West Drayton and Dagenham, and plan to add further spokes to our network in 2016. We also increased the size of our spokes in Bristol, Leeds and Oxford. This will enable us to further develop and optimise our delivery network to drive efficiency in the long term.
Mature CFC Efficiency
Drops per Van/Week
Our Proprietary Equipment Solution
Using the benefit of our many years focused on online grocery operations, we have now completed our vertical integration into mechanical handling equipment ("MHE") with the design and development of our proprietary physical fulfilment solution.
Our MHE solution is now the subject of filed and planned patent applications and other intellectual property rights. It is controlled by proprietary software and algorithms, offers significant advantages over other physical MHE available, and has been specifically designed to cope with the challenges presented by grocery activities, such as huge volumes of items, multiple product lines, and irregular demand patterns.
The equipment solution offers very dense and efficient storage through the use of a 3 dimensional grid to hold product. This grid can be built to a much greater scale than existing MHE storage solutions. CFC Erith will have capacity to hold over 700,000 stock holding totes across chilled and ambient temperature regimes ready for single item picking.
Very fast mechanised inbound and outbound processes for moving product and completed orders into and out of the grid are enabled by our new proprietary communications system multiple times faster than existing wifi. Our communications system can utilise and control thousands of fast, space efficient, densely located robotic devices that each occupy just a single location on the top of the grid and enable very quick and flexible item retrieval of any product, in any order, stored in the grid.
All product picking into customer baskets follows a one-to-one goods-to-man approach where relevant stock items are presented to the picker at the same time as the order tote. The combined effect is very fast and highly accurate product picking across the entire ambient and chilled ranges (over 600 items per hour), with the capability of picking an entire customer's typical 50 item order in under 5 minutes, significantly shortening order lead times.
Our MHE solution can be retrofitted into standard warehouse buildings, and is modular in nature (can be built any size, scalable (can be increased in size) and faster to deploy (shorter build and commissioning lead times), providing significant benefits in better matching capacity requirements to business demand volumes.
Looking forward, our MHE solution is "future-proofed" in that all human points of contact sit on the periphery of the grid, and could be "swapped" out and replaced by automated or robotic solutions once technology advances in those particular areas (for example, robotic arms and fingers one day picking individual grocery items).
Our single end-to-end solution for online grocery retailing (combining our MHE solution with our technology software and systems) places us at the forefront of rapid change taking place in grocery distribution, enabling both of our retail businesses and those of our future international partners.
Andover Fast Facts
- Due to open shortly and required for ongoing Ocado grocery business growth, Andover CFC will increase our fulfilment capacity by around 65,000 orders per week, stocking the full range of products, or approximately £350 million in sales value.
- The site will house the first implementation of Ocado's new, internally developed, proprietary mechanical handling equipment and associated software platform solution
- At maturity, the solution will be capable of delivering significant productivity and fulfilment benefits in a highly modular and flexible design
- Ocado acquired the 18+ acre site and associated building in 2014 enabling the extension and refurbishment programme to commence, resulting in a 240k sqft building.
- Quicker construction, commissioning and implementation programme than experienced with previous sites helps improve capital efficiency.
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our proprietary equipment solution
3. Utilising Proprietary Knowledge
Our Intellectual Property
In building our retail business we have focused on developing optimal solutions solely for online retail operations, specifically centred on the grocery industry.
Our learnings, together with the solutions we have developed, provide an end-to-end process for completing 'the retail mission', moving a product from a supplier into a customer's home. As part of our core competence, we develop proprietary processes, physical infrastructure solutions, systems and software.
Our software and other technology solutions are developed in-house by our technology team (currently over 700 people) together with our development engineering team. Our in-house teams enable rapid development and implementation of new solutions for our business, and enable the software to be updated without the need to involve expensive change processes from multiple software providers.
Our new infrastructure solution encompasses very dense storage suitable for grocery operations, and multiple moving robotic devices requiring very fast wireless communication at a rate of 10 messages per second which need to be confirmed. We recognised that no existing telecommunications system provided this capability.
In order to address this communications challenge, we assembled a team to design and develop our own telecommunications system capable of transmitting large amounts of data from base stations, located within the warehousing system, to large numbers of fast moving, densely packed robotic container-handling devices operating over a large area. Conservatively, the current system allows for data communications with in excess of 1,000 robotic container-handling devices per base station, each base station being capable of covering an area of well in excess of 100 metres radius. We have filed for patent protection for this new proprietary telecommunications system.
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Proprietary Equipment Solution and Andover CFC
Morrisons One Year On
We have built our business using proprietary technology to improve efficiency, productivity and resiliency of our operations, and to enhance the user experience for customers. We consider the building of competitive advantages across our business and operations key to maintaining our technological leadership, driving the development of our customer proposition and economic improvement. We take careful measures to protect our intellectual property and inventions. As we have developed more physical equipment solutions, we have recognised the value of adding more protection for some of our developments through filing patent applications.
As at the end of the period, we have filed patent applications covering 32 separate innovations, bringing the cumulative total number of patent applications filed to 73, of which 25 have so far been published. Our patent activities are intended to create a web of protection for our intellectual property.
Progress in 2015
We have previously set out three requirements which we would need to deliver to allow us to progress opportunities to monetise our platform further with Ocado Smart Platform. They were:
- Operating our first platform deal to the continued satisfaction of our partner, Morrisons;
- The replatforming of our IT systems to enable faster replication, rollout and lower maintenance costs in the future; and
- To first use our new proprietary infrastructure solution in our own facility prior to any live operation for a new partner.
We have made progress in all these areas.
The commercialisation of our IP and knowledge platform has already started with our 25-year agreement with Morrisons to launch and operate their online business.
To remain at the forefront of change in the grocery industry it is important that our technology solutions are able to take advantage of the latest developments in using cloud and next generation software tools.
This involves migrating our solution to the cloud and in the process, transforming our technology stacks. Replatforming enables us to evolve our customer offer with much greater speed and reliability for our existing retail businesses and for those of our existing and future partners, as well as facilitate international expansion through faster replication, improved business agility and scalability and reduced maintenance overheads.
The replatforming project commenced in 2014. The project is a continuous process where discrete elements can be utilised as they are completed, with the entire replatformed systems being introduced over the time of the project.
Our Andover CFC, which is due to open shortly, will first implement our new, internally developed, proprietary mechanical handling equipment and associated software platform solution.
Number of Technology Staff*
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Technology is at the heart of our business. We develop and utilise proprietary processes, systems and software throughout our entire business to improve efficiency and operations. Our user interfaces and applications for our customers are market leading.
As of November 2015, Ocado Technology* employs over 700 software engineers and IT specialists, comprising over 50% of our head office headcount. We expect that the headcount will continue to grow to around 1,000 by the end of 2016. We opened our first overseas development office in Krakow, Poland, in 2012.
Due to its success, we opened a second technology centre in Wroclaw, Poland, and at the end of 2015, established a centre in Sofia, Bulgaria. We plan to open a further development centre in Southern Europe in 2016. In parallel with this near-shoring, we are continuing to expand our UK development centre in Hatfield. Ocado Technology continued to build its reputation as a global technology leader, attracting quality professionals to build the teams underpinning Ocado's technology expertise.
*This does not include engineers with specialisms in mechanics, construction or manufacturing who are also involved in fulfilment development.
Proprietary equipment solution in Andover