"Our aim is to make the shopping experience more personal for each customer."

The last twelve months have been an important period of development for Ocado as we improved the shopping experience for our customers, while making significant progress in each of our strategic objectives of driving growth, maximising our efficiency and utilising our knowledge, each important elements for our ultimate goal of delivering long term shareholder value. In particular, we have opened our new Customer Fulfilment Centre in Dordon, Warwickshire, and signed a landmark agreement with Morrisons to launch and operate their online grocery business. Our offer to customers continued to improve and we delivered year-on-year sales growth ahead of the online grocery market.

At the same time the underlying market for online grocery shopping continues to expand, with all major supermarket groups investing to satisfy this growing demand and a general acknowledgement of the structural shift to online taking place in the grocery sector. Our strategy, intellectual property and unique approach, which is based on aggregation of scale, automation and proprietary technology position us strongly in this expanding market.

Strategic objectives

We drive shareholder value through the application and commercialisation of our proprietary intellectual property and technology. This allows us to deliver our strategic objectives through a number of complementary strategic actions:

  • Developing our proposition to customers to retain our market leading position in terms of service, range and price;
  • Growing customer numbers and spend by building an ever growing base of loyal and valuable customers and encouraging them to use Ocado for more of their needs;
  • Optimising operations to operate our service at the lowest possible cost;
  • Enhancing the capital efficiency of future capacity and driving scale benefits; and
  • Developing and leveraging our proprietary intellectual property and technology to generate significant value through monetisation.

As a growing company operating in a rapidly changing marketplace, we have to make decisions on certain investments to support the continued growth and development of our business, even where they have an impact on short term profitability. As examples, the investments in the CFC2 and NFDC projects will, we believe, benefit the long term prospects of the business, although in the short term have resulted in a pre-tax loss before exceptionals of £5.1 million.

"The Ocado own-label brand continues to grow in popularity with sales up over 60% year-on-year."

Developing our proposition to customers

We have continued to improve the key elements of our proposition to customers – the quality of our service, the range of products we offer, and consumers' confidence in our prices.

A high quality and reliable delivery service is critical to consumers adopting the online channel for their grocery shopping. We believe our customer delivery service remains market leading in the accuracy of orders and on time performance. Orders delivered on time or early significantly improved to 95.2% (2012: 92.7%) and order accuracy also improved to 99.0% (2012: 98.0%) during the period.

We recognise the importance of the shopping experience for existing and potential new customers with speed, ease of use and convenience particularly key elements. We continued to improve each of these aspects during the period. We simplified and shortened the registration process for first time users and enabled customers to import their favourites from existing online shopping competitors, both features reducing the barriers for a new shopper to come to Ocado. We introduced Smart Pass, our membership scheme which combines free delivery, everyday discounts on a range of brands, priority Christmas Delivery slots and exclusive discounts. The majority of orders are now made by Smart Pass holders. We remain at the forefront of the mobile shopping trend, as we continue to enhance our iOS and Android apps. Over 45% of all orders delivered are now checked out over a mobile device, with mobile apps accounting for 34% of all checkouts.

Our aim is to make the shopping experience more personal for each customer, and we have continued along this path by having personalised homepages for customers when they are logged in. We seek to provide customers with inspiration for their cooking, and in the year we introduced recipes on "edit order" reminders.

We extended our range at Ocado.com during the period by around 20% to 34,000 products, including everyday items, our own brand, more non-food and additional specialist ranges. This now significantly exceeds the offer in a standard supermarket. Recent new ranges include international selections such as a South African shop bringing a taste of the savannah to customers, and specialist ranges such as the East India Company's speciality foods.

The Ocado own-label brand continues to grow in popularity with sales up over 60% year-on-year, and the average basket now containing over four Ocado own-label products. Towards the end of the year we started to introduce more tiering into our own brand products, as part of our programme to increase the choice for our customers.

The growth of our non-food range has continued through the period, with more customers adding an increasing proportion of non-food items to their basket. This reflects the appeal to customers of having non-food products delivered in the same convenient one hour time slot as their groceries.

We soft launched the first of our destination sites, Fetch, our pet store, during the period, with the roll out to all of our customers to be completed over the next few months. Fetch is a highly curated specialist pet store with over 6,000 products, including premium pet food and medicinal products such as Hill's, James Wellbeloved, Frontline and Drontal. Again, delivery of items from Fetch can be conveniently delivered alongside customers' weekly grocery orders. We plan to launch further destination sites, with the first during 2014.

Our Low Price Promise ("LPP") basket matching initiative continues to resonate well with our customers, reflecting the competitiveness of our prices and adding transparency to our pricing strategy. By the end of the period, when checking for LPP, over 75% of our customers' baskets were already cheaper at Ocado, reflecting our competitiveness in prices and increased promotional activity.

Growing customer numbers and spend

Our efforts in improving the proposition to customers were reflected both in growing customer numbers and in customer satisfaction surveys, with YouGov BrandIndex results showing that we led our peers towards the end of the period.

Our active customers at the end of the period stood at 385,000 (2012: 355,000). Our focus on attracting more new customers continued through the period, with the rate of new customer acquisition over 40% up on the previous year. Our order growth from frequent shoppers has been stronger, with the number of frequent customers increasing over twice as quickly as the growth in active customers. We have placed less focus on occasional customers who typically are motivated by promotional vouchers and as a result the number of infrequent customers reduced as a proportion of our active customers as we reduced voucher activity.

While total marketing expenditure on attracting new customers has increased, our corresponding reduction in retention vouchering activities has seen overall marketing costs, including voucher spend, marginally down as a percentage of sales.

As we increase our range and the ease with which our customers can shop, it is more likely our customers will purchase more of their weekly requirements from us. Reflecting this trend our customers' average baskets stood at £113.53 (2012: £112.10).

Optimising operations

CFC1 continued to operate to a high level and with improved efficiency. Using the units per hour efficiency measure, the average productivity for the period in CFC1 was 135 UPH (2012: 121 UPH).

Order volumes have grown to an average of over 143,000 orders per week ("OPW") (2012: 123,000 OPW) with the highest number of orders delivered in a week exceeding 166,000 during the period. Following the opening of CFC2 in February, we have been executing an operational plan to migrate some orders to be fulfilled from it. At the end of the period, approximately 60% of orders were fulfilled from CFC1 with the balance from CFC2, in line with our expectations.

While still in ramp up phase, CFC2 started to demonstrate its potential for improved efficiency and orders became cheaper to be picked from CFC2 than CFC1 during the second half of the year. The success of the ramp up of capacity utilisation in CFC2 gives us confidence in our ability to manage the additional throughput of products and orders from Morrisons.com.

We continue to introduce new developments to our CFCs to further improve efficiency in a cost effective manner. Our first purpose designed bagging machine, introduced into CFC1, is now an integrated part of the fulfilment operation in Hatfield, and we shall be investing in additional bagging machines during 2014.

Our delivery performance continued to improve, benefiting from increased customer density, with DPV of 160 (2012: 152 DPV).

Enhancing the capital efficiency of future capacity

CFC2, formally opened by the Prime Minister, the Rt Hon David Cameron MP in April, went live with the first customer orders picked on 24 February 2013, on time and on budget. We have been steadily ramping up this facility since then, with CFC2 reaching a peak during the period of approximately 60,000 OPW.

CFC2 opened with capacity for 120,000 OPW, and since opening we have committed to our Phase 2 development, which will take CFC2 capacity up to over 180,000 OPW at a capital cost of £41 million over an 18 month period. Morrisons will pay for part of this capital cost under our agreement with them. During Phase 2 works, scheduled to be completed in the second half of 2014, there may be some short-term impact on UPH in 2014, while our long term efficiency target for CFC2 remains to exceed 200 UPH.

We also commenced operations at our NFDC in Welwyn Garden City, Hertfordshire, which we opened in January 2013. This will support the longer-term growth in non-food, our dedicated pet store, Fetch, and future destination sites.

As a result of our agreement with Morrisons, capacity in CFC2 will be utilised faster than had originally been planned. Consequently, during the coming year, we are likely to commit to the next CFC project to ensure that we continue to have sufficient fulfilment capacity to accommodate future growth. In addition, we are looking at options to modularise future fulfilment capacity investments, to further improve our capital efficiency and potentially reduce the lead time to build. We anticipate providing further details on these plans during 2014.

We plan to invest further in CFC1 to increase capacity and to improve resilience. We intend to add to our spoke capacity with the opening of additional spoke locations next year, sharing both costs and capacity with Morrisons.

Anticipated capital expenditure in 2014 on capacity (CFCs, spokes and vehicles) is approximately £100 million, excluding expenditure on new CFCs. This includes our planned expenditure on new technology covered below.

"We have utilised proprietary IP and technology as the foundation of our business."

Developing and leveraging our proprietary intellectual property ("IP")

Since inception we have utilised proprietary IP and technology as the foundation of our business. Maintaining and enhancing technology leadership in systems, processes and equipment supports our market-leading proposition to customers and drives operating excellence. This technology leadership affords us opportunities to generate significant value for Ocado through the commercialisation of our IP and operating knowledge. During the period we filed patents on a number of developments, with further patent filing in progress.

In May we announced our first strategic client for our IP and operating services with the signing of a 25 year agreement with Morrisons to launch and operate its new online grocery business, Morrisons.com. This agreement covers a number of arrangements which provide additional revenue and profit streams, improve our economic model with the sharing of capital and operational costs, deliver faster utilisation of capacity and more efficient scalability, strengthen our balance sheet and enable greater investment in R&D in the future.

On 18 July, shareholder approval, as required under the Listing Rules, was obtained for these arrangements to be concluded. Consequently, a 25 year sale and leaseback of the Dordon CFC and related Mechanical Handling Equipment ("MHE") was concluded, together with the payment of initial contract revenues resulting in the inflow of approximately £170 million.

Following significant preparation work, we were pleased that Morrisons.com was launched as planned with the first orders delivered on 10 January 2014.

Ocado's rights and obligations to source products (including Waitrose own-label products) from Waitrose remain unaffected by these arrangements.

In addition to the direct benefits to Ocado of this agreement, we consider it a strong validation of Ocado's operating model, providing a unique solution for the challenges faced by grocery retailers worldwide as the online channel continues to increase in importance. It also endorses the commercial value of our IP and operating knowledge, providing a template for future deals. We are expanding our IT team, and expect to increase the number of developers and other IT staff by around 50% by the end of 2014. The primary focus will be on re-platforming our IT systems to enable the faster replication and roll out for international expansion, the rapid improvement of customer interfaces and other projects to drive efficiency in both our operations and central teams.

Market backdrop

While there appears to be a more positive outlook for broader economic growth in the UK, we believe this has yet to translate into sustained improvements in consumer spending and the broader consumer environment remains subdued.

However, the market for online grocery shopping continues to expand, evidenced by the online growth figures reported across the industry, as more consumers see the benefits of doing their grocery shopping from the comfort of their own homes. All the major UK supermarket groups are now investing to satisfy this growing demand, with a general acceptance that online will become a significant channel in grocery shopping. Overseas there continues to be more interest and investment in online services in many markets, including by major incumbent supermarket groups seeking to address this structural shift and by online retailers, such as the expansion of Amazon Fresh in the US.

"Our customers regularly commented on the outstanding service provided by our delivery team."

People, recognition and awards

Having created over 1,000 jobs during the year, by the end of the period we employed over 6,700 people and their energy and commitment remain central to our success. I wish to acknowledge their tremendous efforts throughout this very busy period. Once again, our customers regularly commented on the outstanding service provided by our delivery team of over 2,500 Customer Service Team Members.

With our own growth and with the agreement to provide services to Morrisons.com, we anticipate total employee numbers to rise by around 1,000 during 2014.

We were delighted to be recognised with a number of awards during 2013, including the World's Best Online Retailer by the Grocer (The World's 50 Best Grocers), the Best Online Grocer by Which? (Members' Annual Satisfaction Survey) and Supermarket of the Year in the Loved by Parents Awards.

We also won awards for our user experience including the Grocer 33 Best Mobile Shopping Experience, and for our Ocado own-label products. These included the Loved by Parents Best Grocery Product for our Ocado own-label organic vegetable boxes and Gold Star Awards from the Great Taste Awards for a number of Ocado own-label products.

We received recognition for our continuing efforts in Corporate Social Responsibility ("CSR") from the International CSR Excellence Awards (Gold Award for Corporate Social Responsibility) and the World CSR Awards (Gold Award for Environmental Responsibility).

Board update

Further to his appointment to the Board as an independent Non-Executive Director and Chairman Designate in March 2013, Sir Stuart Rose assumed the role of Chairman following our annual general meeting on 10 May 2013. Lord Grade retired as a Non-Executive Director and Chairman at the 2013 annual general meeting.

Reporting, current trading and outlook

As the contribution from the Morrisons agreement becomes more material, we plan to provide segmental reporting, but have not provided this for 2013 as it is not material to the results. We have given the key metrics including total sales and ratios for margins and costs for Ocado.com (including Fetch) to facilitate analysis of underlying trends and our business model. We have also provided information on cash flow and debt on an "external" basis, thus removing the impact of the finance lease from our asset holding joint venture with Morrisons.

We finished the year with annual growth in gross sales for Ocado.com of 17.2% year-on-year. This includes the benefits of a sustained period of significant increase in customer growth year-on-year. In 2014, we expect to grow broadly in line with, or slightly ahead of, the market.