Chief Executive Officer
The validity and robustness of our retail business model is reflected in our 2015 performance.
Good progress in a challenging market environment
The UK grocery market continued to experience significant challenges throughout 2015. Ongoing price competitiveness and deflationary pressure combined with changing customer behaviour, in particular with continued shifts to discount stores and online, have been reflected in declining store volumes at large supermarkets and margin pressure across the industry.
Notwithstanding this challenging market environment, we continued to deliver our strategic objectives, namely, to drive growth, maximise efficiency and utilise our knowledge, ideally positioning ourselves to benefit from the continued channel shift to online grocery shopping. Our strategic objectives apply equally to our own retail business and to our existing and future platform activities.
The validity and robustness of our retail business model is reflected in our 2015 performance. We grew our sales ahead of the broader UK online grocery market and well ahead of the overall UK grocery market, progressed work on our two next generation CFCs, continued to deliver good services to Morrisons.com, and advanced discussions with multiple potential international partners for our Ocado Smart Platform.
Progress against our strategic objectives
We have a number of key complementary actions, which form a framework to achieve our strategic objectives for our retail and corporate customers, intended to deliver long-term shareholder value. These actions are to:
- Constantly improve the proposition to customers;
- Strengthen our brands;
- Develop ever more capital and operationally efficient infrastructure solutions;
- Enhance our end-to-end technology systems; and
- Enable Morrisons' and future partners' online businesses.
Constantly improve the proposition to customers
Offering the best possible proposition to our customers has remained our core focus and is central to driving the growth of both our retail and partner businesses.
In our retail business, we continued to improve the key elements of our proposition to customers – our high quality service and user experience, the broadest selection of products to choose from and the competitiveness of our pricing.
We improved across all these core elements. Our customers have continued to recognise the quality of our service and extensive range of products, evidenced by the award of Best Online Supermarket in The Grocer Gold Awards 2015 and Best Online Grocer by Which Magazine for the sixth year running. We believe this reflects the strengthening recognition of our consumer brand.
A consistently positive shopping experience is essential to encourage consumers initially to try Ocado and then to return to us for future shops. We believe that increasingly consumers will seek to fulfil their grocery shopping requirements online if they consider it the more compelling alternative to current store based propositions. Our focus has remained on improving the customer experience by enhancing the speed, convenience and ease of using our service, allowing customers to be able to shop anywhere, anytime, across intuitive and easy to use interfaces.
Our new mobile website for Ocado.com, which was launched in January 2015 to complement our existing mobile apps, allows our customers to shop more easily using their mobile devices and has proven to be popular especially among first time users of our service. Mobile continues to grow in importance for Ocado and the wider retail sector. In 2015, over 50% of all orders were checked out using a mobile device, using our latest apps and browsers.
We aim to be at the forefront of new developments and have continued to focus on improving elements and features of the customer interface to enhance the speed, convenience and usability of our service. In 2015, we launched a redesigned Android app and our first Apple Watch app which enabled Apple Watch owners to shop using their device on the first day of its launch in the UK.
The retention rate of new customers is important to support our growth and this has remained in line with historical trends. We have introduced features such as Import Your Favourites, reduced the number of steps in the registration process, added the ability to start to shop with us without having to log in first, improved our product search and introduced payment by PayPal. They have proved to be beneficial in encouraging new customers to shop for the first time and then for subsequent shops.
A reliable and high quality delivery service and experience is critical to our customers and our business. We believe our customer delivery service continues to be market leading. Delivery on time or early, in the customer selected one-hour delivery window, remained at a high level of 95.3% and order accuracy remained at 99.3%. Our Customer Service Team Members provide the important quality face-to-face interaction with our customers.
Customers can now choose from nearly 47,000 SKUs (2014: 43,000 SKUs) when shopping at Ocado.com. This includes everyday items, the Ocado and the Waitrose own label products, our customers' favourite brands, non-food items and many specialist and international product ranges.
2015 saw the launch of our vegetarian "shop in shop" with over 650 vegetarian and vegan products in one place. The shop has proved popular with customers due to the extensive range which includes big brands alongside niche products from small suppliers, and we were recognised as the Best Online Retailer for Vegetarians in the Veggie Awards 2015.
With the continued price competitive market environment, our Low Price Promise ("LPP") basket matching scheme ensures that we stay price competitive against the market leader. This provides transparency of our pricing strategy to give our customers confidence in what they are paying for their shopping. Despite price reductions and broader food price deflation in the market, over two thirds of our customers' baskets were already cheaper at Ocado when checking for LPP. The cost of LPP to Ocado in the form of vouchers used during the period has increased by less than 5bps and remains low, reflecting our competitiveness in prices and sustained promotional activity.
The Ocado Smart Pass, our bundled customer benefit membership scheme which includes free delivery, continued to be popular with over half of sales coming from customers with a pass. Membership helps to drive customer loyalty, shopping frequency and ultimately total spend per customer.
Our non-food sales have continued to grow, with year-on-year growth of over 60% and now on average one non-food product per basket, despite current limited investment in technology in that area. Growth was driven by further development of the non-food range on Ocado.com and strong sales growth from our destination sites Fetch, our specialist pet store, and Sizzle, our kitchen and dining store. Both complement our range at Ocado.com and reflect the convenience of shopping from a broader general merchandise product range alongside customers' regular grocery shop.
Preparations for our premium beauty business in partnership with Marie Claire are progressing well and we expect to launch this in the second half of 2016. We believe the high quality of service delivered by our technology and logistics platform combined with the awareness and relevance of the Marie Claire brand, should make this an attractive shopping destination for customers.
As we add improvements to our retail proposition, this enhances the key features we can apply to the technology embedded in our platform, thus benefiting our existing and future corporate customers.
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We have developed a proprietary end-to-end solution for operating grocery online...
We continued to broaden the awareness, and reinforce the strength and values of our Ocado, Fetch and Sizzle brands through our marketing and promotional activities.
We focused our modest marketing expenditure on attracting new customers with broader awareness campaigns with external partners, as well as limited radio and national newspaper offers and sponsorship opportunities such as the food section of the Ideal Home Show. Ocado was also featured in a number of broadcast media programmes including BBC's 'Tomorrow's Food', BBC One Breakfast at the Autumn Fair and most recently, on Channel 4's 'Journey to the Centre of my Plate', a show highlighting food journeys and ITV's 'Tonight' show.
Following the great success of last year, we launched our second "Britain's Next Top Supplier" competition, an initiative to support and nurture small British suppliers, who form a significant part of our supplier base.
Our Ocado own-label reinforces brand recognition and strength and continues to grow with sales up 16.8% against the equivalent period last year, with growth constrained by our contractual obligations with Waitrose. The average customer basket now contains over five Ocado own-label products. The popularity of these products is further evidenced by several awards received for our Ocado own-label products in 2015. These included awards for the Ocado own-label organic juicing and organic small veg boxes by Women's Fitness as well as awards for meat products including best lamb product for Ocado's Exclusives British lamb leg steaks by the Meat Management Industry.
Our active customers grew to 509,000 (2014: 453,000), up 12.4% and exceeded the half a million customers threshold for the first time. 2015 continued to see strong growth in new customer acquisition, up by over 20% during the period. Our overall marketing spend, including vouchering, has remained in line with retail sales percentage growth.
Our order volumes have grown to an average of over 195,000 orders per week ("OPW") (2014: 167,000 OPW), a strong growth of nearly 17% with the highest number of orders delivered in a week exceeding 225,000 during the period.
Our customers' average basket reduced by 2.1% to £109.95 (2014: £112.25) due to both the competitive environment and from the impact of increased destination site orders from Fetch and Sizzle. Excluding the impact of destination site orders, the average basket value declined by 1.3% to £111.15 (2014: £112.66). As the number of items in the average grocery basket was stable, this decline compares well to the price deflation seen in the overall UK grocery industry.
Fetch has continued to grow, with strong customer acquisition reflecting better brand awareness, and sales driven by specialist pet food lines. Sizzle has grown more modestly with limited marketing support, whilst we wait to complete further usability improvements.
During the year we introduced the Ocado Smart Platform as a brand to simplify and strengthen the marketing of our service for international retail partners.
Develop ever more capital and operationally efficient infrastructure solutions
Both our Hatfield Customer Fulfilment Centre ("CFC1") and our Dordon Customer Fulfilment Centre ("CFC2") continued to operate to a high level of accuracy and with improved efficiency. Using the units per labour hour efficiency measure ("UPH"), the average productivity for the period in our Mature CFC operations was 155 UPH (2014: 145 UPH), where we consider a CFC to be mature if it has been open for 12 months by the start of the half year reporting period. We made good progress with the construction of our new CFCs in Andover, Hampshire ("CFC3") and Erith, South East London ("CFC4"). We commenced the first installation of our new proprietary modular, scalable physical fulfilment solution into our Andover CFC, and anticipate going live shortly. CFC3 will add 65,000 OPW at full capacity at an estimated capital cost of £45 million for the material handling equipment ("MHE").
At the Erith site, the developer commenced building works in H1 2015 and we expect to start our fit out works at this site in 2016 with the plan to commence operations at the end of 2017. The MHE solution in CFC4 is estimated to cost £135 million and will add over 200,000 OPW of capacity to our operation.
As with CFC3, this CFC will use our proprietary modular, scalable fulfilment solution, and so the investment will be phased over time in line with our capacity requirements. It will also make this the most capital efficient CFC to be built to date, lowering the capital costs involved in operating full service online grocery operations thus improving our own economics and enabling us to offer the same solution at attractive pricing to future corporate customers of our Ocado Smart Platform offering.
We made a number of enhancements to our routing system throughout the year, which led to an improvement to the average deliveries achieved on a van route and has helped us increase deliveries per van per week across all shifts ("DPV") to 166 (2014: 163). We have also raised our long term target for DPV from 175 to 190.
We expanded our delivery capacity within our existing catchments with the opening of three additional spokes during the period at Dagenham, West Drayton and Milton Keynes. In addition, we opened the Park Royal spoke site which replaced our smaller White City location nearby. In 2014 we received a one-off compensation payment of £1.2 million from the landlord at the White City spoke to cover costs of closure and the fit out costs of the new site, with a further final £3.2 million received in 2015. The delivery capacity for some of these new spokes is shared with Morrisons, reducing the impact of the additional fixed costs of these operations.
Our Capabilities and Ocado Smart Platform
Enhance our end-to-end technology systems
The core of our business is our proprietary IP, knowledge and technology that supports our market leading proposition to customers and drives our operating efficiencies. We seek to continually improve the technology we use and believe that this innovation creates competitive advantages across our business. As at the end of the period we had 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 protection for our intellectual property.
Over time we have developed a proprietary end-to-end solution for operating grocery online, from the initial point of contact with the customer, through the extensive fulfilment operations, to the delivery of the basket of products to the customer's kitchen. Each stage of the operation is optimised using our software and algorithms. Our technology systems form a key part of this solution.
We continued to develop our platform with the rewrite of our IT systems to enable faster replication and roll out of our technology internationally, and remain on track with our plans. This has been supported by the expansion of our technology team which by the end of the period employed over 700 developers and IT professionals, with plans to increase this to around 1,000 by the end of 2016. Our technology professionals currently operate from the UK and Poland, with a new Ocado technology centre recently established in Bulgaria and another due to open in Southern Europe.
Our technology team focuses on improving customer interfaces to support our businesses and those of our partners, replatforming to improve speed of systems development and to enable international expansion, and other projects to drive efficiency in our operations.
Enable Morrisons' and future partners' online businesses
We have built our retail operating business through developing and utilising proprietary technology. This gives us opportunities to generate significant value through commercialisation as the innovations used in our own retail operations can be embedded into our platform for existing and future partners.
Our first commercialisation agreement, with Morrisons, resulted in the launch of Morrisons.com in January 2014. Using our existing CFC infrastructure and technology solutions, Morrisons.com has continued to develop well. In March 2015, Morrisons reported that the run rate of sales after 12 months of trading for Morrisons.com had reached about £200 million and has continued to develop well. To our knowledge this is the fastest ramp up of an online grocery business globally, and provides evidence of the effectiveness of combining our platform with an existing grocery retailers' brand, customer awareness and merchandising skills.
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 now installed in CFC3. Multiple patent applications have been filed for the MHE solution. Together with our end-to-end software and systems based technology, offers a total solution for efficiently operating online grocery businesses. We have packaged this into a single service offering referred to as Ocado Smart Platform.
During the period, we started to engage and develop discussions with multiple international retailers about how we might assist them in launching or improving online business in their own markets using Ocado Smart Platform.
We set out a target to sign our first Ocado Smart Platform agreement in 2015, and although we have yet to announce a deal, our confidence in the quality of our commercial proposition to international grocery retailers remains high, and we expect to sign multiple deals in multiple territories in the medium term.
For further details on Morrisons.com, see theMorrisons One Year On Case Study
Morrisons.com ... provides evidence of the effectiveness of combining our platform with an existing grocery retailers’ brand, customer awareness and merchandising skills.
People, awards and CR initiatives
By the end of the period, we employed over 10,000 people, a net addition of over 1,500 new employees during the year, to further support the growth of our retail businesses, our Morrisons platform business and the development of Ocado Smart Platform.
We will continue expanding our talent pool in 2016, including the addition of around 300 software engineers and IT specialists in the UK and across Europe.
The energy and commitment of our people remains central to our success and I want to once again acknowledge their remarkable efforts throughout this very busy and exciting period. Our operating model enables us to provide high levels of customer service, and customers regularly highlight the outstanding service they receive, in particular that provided by our Customer Service Team Members who deliver their orders.
The efforts of our people were again recognised by a number of awards received during 2015, including the 'Best Online Grocer' by Which Magazine (Members' Annual Satisfaction Survey), 'Online Supermarket of the Year' by The Grocer Gold Awards, 'Best Online Retailer for Vegetarians' by The Veggie Awards and 'Best Retailer – Gold' by the Healthy Food and Drink Awards.
We believe that the ability to code software will be a vital life skill for the next generation, akin to what literacy is to ours. Our "Code for Life" IT programme, which we launched in September 2014, today counts more than 44,000 users taking advantage of the free resource "Rapid Router" aimed at teaching primary school children across the UK to code. The programme is also being used in schools overseas, such as in the US, Australia, Spain, Portugal and Guatemala.
We launched a 'Donate Food with Ocado' scheme during the year, a virtual food bank that allows customers to donate a sum of money to buy food for the food banks we support. Customers donated nearly £100,000 during the period, and these donations were matched with groceries provided by Ocado.
Our business model has been built around driving efficiency and low waste in our aim of becoming the UK's greenest, most innovative and best value grocery retailer. We have operated plastic carrier bag recycling since 2007 and introduced a 'Bag Recycling Bonus' in September 2015, which incentivises customers to return bags to us for recycling by paying them 5p for every bag (from Ocado or other retailers) they hand back to us. Our Bag Recycling Bonus will also help us to meet the aims of the new carrier bag charging legislation in England, by helping to increase recycling and reduce plastic bag litter.
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We reported gross sales (retail) growth of 14.7% for the period. We expect to continue growing ahead of the online market.
We anticipate that capital expenditure in 2016 will be approximately £150 million, including the expenditure for CFCs 3 and 4, and the increased costs for further development to our infrastructure and technology solutions. The capital expenditure requirements for any Ocado Smart Platform deals signed are not expected to be significant in 2016.
... We expect to sign multiple deals in multiple territories in the medium-term.
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