Ocado Group plc
Annual Report and Accounts
for the 53 weeks ended 3 December 2017
www.ocadogroup.com
Stock code: OCDO
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CHANGING THE WAY THE
World Shops
Established in 2000 to revolutionise the way customers do
their shopping, Ocado is the world's largest dedicated online
grocery retailer.
PURPOSE
Changing the way the world shops.
MISSION
Powered by fresh thinking, we strive for new and improved ways to deliver the
world’s most advanced end-to-end online shopping and delivery solutions. We
are built for this – nobody does it better.
STRATEGY
To deliver long-term shareholder value by:
DRIVING GROWTH
MAXIMISING EFFICIENCY
Continually enhancing the value of
our proposition for our retail and
corporate customers
Harnessing our years of learning we
continually strive to innovate and develop
our technology and operations to
consistently improve our economic
and operating performance
UTILISING OUR PROPRIETARY
KNOWLEDGE
Utilising our IP to create competitive
advantages in our Retail business and to
monetise IP through our Solutions
business
Read more about Driving Growth on
pages 24 and 25
Read more about Maximising Efficiency
on pages 26 and 27
Read more about Utilising Proprietary
Knowledge on pages 28 and 29
Ocado Brands and Partners
OCADO RETAIL
OCADO SOLUTIONS
Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
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OUR
Story
Innovation is Part of Our DNA
Ocado has a proven track record as a disruptor within the grocery market. We
have transformed the way the nation can shop for groceries by developing a
unique model based on highly efficient, fully automated, Customer Fulfilment
Centres (CFCs), flexible and easy-to-use customer software, and friendly and
timely last mile delivery. This model delivers to our customers wider and
fresher product ranges, competitive prices, and highly attractive service which,
in turn, gives us a unique advantage in the UK grocery retail market to grow
our customer base and take market share.
The fact that we have consistently improved our efficiency metrics while
growing both revenue and market share is testament to our ability to
consistently adapt technology to meet customer needs better.
We aim to commercialise our technical capabilities and proprietary
technology through our Ocado Solutions business to help retail partners
internationally launch and develop their own profitable and growing
online operations.
More information about the progress we have made from innovations
can be found in Innovation – Developing solutions for all our customers
section on pages 11 to 13
What this means today
The UK grocery market is undergoing rapid and profound change. Channel
shift from traditional full-service supermarkets to online continues to build
momentum and online is forecast to be the fastest growing channel in
UK grocery over the next five years, according to the Institute of Grocery
Distribution (IGD), with similar trends being seen across the globe. The
UK online sales value is forecast to increase from £10.4 billion in 2017 to
£16 billion in 2022, a 54% increase worth £5.6 billion (IGD).
IGD expects the value of the world’s grocery market to increase by $2.4 trillion
between 2016 and 2021. Grocery retail internationally is in a period of
significant change driven by the adoption of digital technologies. This offers
us huge market opportunities on a global scale.
Ocado is a catalyst for channel shift and our Retail and Solutions businesses
are both well placed to take advantage of the changes which channel
shift brings.
More information on trends in the grocery industry can be
found within the Marketplace section on pages 20 and 21
What this means in the future
Innovation is part of our DNA and our continued investment and thought-
leading research into disruptive capabilities such as artificial intelligence,
robotics and the Internet of Things provide an opportunity to create a
sustainable competitive advantage which will allow us to deliver long-term
shareholder value.
More information on Innovation – Developing solutions
for all our customers can be found on pages 11 to 13
Contents
OVERVIEW
Why People Invest In Us
Progress in 2017
CEO Q&A
Chairman’s Statement
STRATEGIC REPORT
Our Business Model
Our Platform
Innovation – Developing solutions for all our customers
Evidencing Efficiency Improvements
Ocado Retail
Ocado Solutions
Ocado Within the Marketplace
Our Strategy
Our Strategic Objectives: Driving Growth
Our Strategic Objectives: Maximising Efficiency
Our Strategic Objectives: Utilising Proprietary Knowledge
Key Performance Indicators
Chief Financial Officer’s Review
How We Manage Our Risks
Corporate Responsibility
Our People
02
03
04
05
08
10
11
14
16
18
20
22
24
26
28
30
32
38
42
46
OUR GOVERNANCE
50
Chairman’s Governance Overview
52
Board of Directors
Statement of Corporate Governance
54
Leadership and Effectiveness – Nomination Committee Report 62
64
Accountability – Audit Committee Report
DIRECTORS’ REMUNERATION REPORT
Annual Statement from the Remuneration
Committee Chairman
Description of the Remuneration Committee
Remuneration Policy Report
Annual Report on Remuneration – 2017
Annual Report on Remuneration – Implementation
of Policy for 2018
Directors’ Report
OUR FINANCIALS (GROUP)
Independent Auditor' Report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
OUR FINANCIALS (COMPANY)
Company Balance Sheet
Company Statement of Changes in Equity
Company Statement of Cash Flows
Notes to the Company Financial Statements
ADDITIONAL INFORMATION
Glossary
Alternative Performance Measures
Five Year Summary
Financial Calendar
Company Information
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91
107
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120
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Stock Code: OCDO | www.ocadogroup.com
WHY PEOPLE
Invest In Us
Largest dedicated online
grocery supermarket in
the world
Significant market opportunity
in grocery, the largest retail
segment
More information on the IFC and page 01
More information on pages 20 and 21
Ideally positioned to benefit from
continuing channel shift to online
Proprietary intellectual property
creating significant competitive
advantages
More information on pages 08 to 10
More information on pages 10 to 15
Commercialising intellectual property
offering significant opportunities for
Solutions business
End-to-end operating model
provides structural advantages
More information on pages 18 and 19
More information on pages 14 to 15
Superior customer offering with
leading service, range and price
proposition drives growth
Operational leverage and
virtuous cycle of growth,
investment and innovation
More information on pages 16 and 17
More information on page 10
Proven and invested
management team driving
strategy and execution
Actively promoting responsible
business behaviour
More information on pages 52 and 53
More information on pages 42 to 45
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 PROGRESS
In 2017
Overview
Overview
Strategic Highlights
• Signed our first two* international Ocado Solutions partnerships to enable
our partnerʼs online operations
• Continued to scale our latest CFC in Andover, UK, which utilises the first
installation of our proprietary equipment solution
•
Launched the first instance of our Ocado Solutions store picking capability
with Morrisons.com
• Developed new technology and IP, with multiple patent applications filed
and granted
Operational Highlights
ACTIVE CUSTOMER BASE
2017: 645,000
2016: 580,000
AVERAGE ORDER SIZE (£)
2017: 107.2
2016: 108.1
DELIVERIES PER VAN PER WEEK
MATURE CFC EFFICIENCY (UPH)
2017: 182
2016: 176
2017: 164
2016: 160
PRODUCT WASTE (%)
NUMBER OF OCADO SOLUTIONS PARTNERSHIPS SIGNED*
2017: 0.7
2016: 0.7
2017: 3
2016: 1
* We signed our third international partnership with Sobeys at the beginning of 2018.
Financial Highlights
REVENUE (GROUP) (£m)
53 week 2017: 1,463.8
52 week 2017: 1,432.9
2016: 1,271.0
EBITDA (GROUP) (£m) A
53 week 2017: 86.0
52 week 2017: 84.3
2016: 84.3
REVENUE (RETAIL) (£m) A
EBITDA (RETAIL) (£m) A
53 week 2017: 1,346.1
52 week 2017: 1,317.4
2016: 1,171.6
53 week 2017: 81.0
52 week 2017: 79.2
2016: 75.8
REVENUE (SOLUTIONS) (£m) A
EBITDA (SOLUTIONS) (£m) A
53 week 2017: 117.7
52 week 2017: 115.5
2016: 99.4
PROFIT BEFORE TAX (GROUP) (£m)
53 week 2017: 1.0
52 week 2017: (0.5)
2016: 12.1
53 week 2017: 2.5
52 week 2017: 2.7
2016: 5.5
A
See Alternative Performance
Measures on page 196
All numbers on this page are reported on a 52 week basis
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Stock Code: OCDO | www.ocadogroup.com Q&A WITH
Tim Steiner
Tim Steiner
CHIEF EXECUTIVE OFFICER
Q. ARE YOU SATISFIED WITH THE RAMP-UP OF YOUR THIRD CFC IN ANDOVER IN 2017?
A. Our CFC3 at Andover is a revolutionary facility containing the very latest technology developed by
Ocado. I am pleased to report that we have successfully ramped up capacity at Andover over the
course of 2017. Today, we deliver thousands of customer orders each week from the facility and we
expect to make further significant progress in 2018. Throughout the year, as well as driving increasing
numbers of orders through the CFC, we have focused on improving the reliability and resiliency of
the facility as we look to get the most from our proprietary new technology.
Q. HOW MANY SOLUTIONS PARTNERSHIPS SHOULD WE EXPECT IN 2018?
A. With five retailers now using or signed up to our platform, we are confident that we will be able to
do further deals with the momentum of new signings building over time. We are in an increasing
number of ongoing conversations with retailers across the world and significant mergers and
acquisitions across the grocery industry this year have helped progress many of these conversations,
most notably Amazon's acquisition of Whole Foods.
Q. HOW MANY SOLUTIONS PARTNERSHIPS CAN YOU COMMIT TO GIVEN THE RESOURCES
YOU HAVE?
A. We are committed to giving our partners an excellent service and we have invested in the resources
to do multiple deals. We don’t have unlimited capacity, of course, so, depending on the number,
complexity and type of deals we do, we may need to prioritise some future deals.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CHAIRMAN’S
Statement
"Investment in new
technology, innovation and
customer growth are keys
to the creation of long-
term shareholder value for
Ocado ."
Lord Rose
CHAIRMAN
Overview
It has been a year of great change at Ocado with continued profitable growth of the Retail business in the UK,
significant development of the Ocado Solutions business and ongoing investment in and advancement of our
platform.
We aim to provide our retail and commercial customers with an advanced online grocery shopping solution. The
Ocado Solutions business took some exciting steps in delivering this strategy with the signing of three international
customers. Ocado signed agreements to provide OSP to Groupe Casino in France and Sobeys in Canada to allow
them to grow and develop their online food businesses. We secured another agreement with a regional European
retailer to help build its online grocery business using the Ocado Smart Platform. These significant commitments,
although having limited financial impact in 2017, are expected to create significant long-term value.
These partnerships and continued progress made in discussions with other international grocery retailers are due in
part to more dedicated focus being placed on the Ocado Solutions business, including in particular the recruitment
of Luke Jensen to lead this business. This, coupled with the ongoing development and improved performance
of OSP and tailoring of the OSP offering to international retailers’ specific requirements, has helped make Ocado
Solutions more successful in 2017.
Our Retail business continues to grow profitably, on the back of continued investments in the customer proposition and
despite rising input costs experienced across the grocery retail sector. We expect to see ongoing challenges for the Retail
business both with respect to customer numbers and margins, particularly given the modest growth forecasts for the UK
grocery market. The business will need to address these market challenges as well as the shift in market dynamics towards
increased shopping frequency, greater convenience and short delivery lead times. Given the market context and recent
performance we believe our retail strategy is still the right one, namely to focus on growth by broadening our addressable
market and differentiating on service and range, while price following the market leader. As well as improving the customer
experience, we aim to maximise efficiency by focusing on technology innovation and operational improvements. These
changes help to decrease the costs per order and increase the Group’s overall profitability and to offset the impact of some
of the wider market headwinds, namely rising labour rates.
The Andover and Erith CFCs will allow our business to continue growing. One of the biggest challenges facing
the Group is ensuring that capacity is made available in time to meet our expected growth in customers. Scaling
capacity at the Andover CFC continues as the reliability and resiliency of software and material handling equipment
improve. Ongoing investment in our technology and engineering capabilities should help ensure we advance
towards our operational efficiency targets, though as experienced in 2017, we do not expect this progress to be
without difficulties in the future.
The increase in UK capacity and development of our proprietary platform have required significant expenditure. The
Group increased the funding available to support this investment during the period. The Group diversified its sources
of funding with its first public debt market fundraising. The increase in funding available will allow Ocado to grow the
business, including expansion of the Andover and Erith CFCs and further development of our platform, fulfilment and
technology capabilities.
Investment in new technology, innovation and customer growth are keys to the creation of long-term shareholder
value for Ocado. The management team is aware that as the business grows, the objective of retaining and recruiting
quality people becomes ever more important. Growing headcount in specialist areas of information technology and
engineering is crucial to meeting our innovation and development plans. We remain focused on this and ensuring that
available resources are allocated effectively and prioritised on the Group’s most important strategic objectives.
Looking forward, our efforts will be focused on continuing to successfully develop our online grocery shopping
solution both for our retail customers and our commercial partners in the UK and internationally. We look forward
to delivering this and pursuing many more successful collaborations with leading retailers across the globe.
Lord Rose
CHAIRMAN
6 February 2018
See page 52 for the Board of Directors
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 STRATEGIC
Report
Our Business Model
Our Platform
Innovation – Developing solutions for all our customers
Evidencing Efficiency Improvements
Ocado Retail
Ocado Solutions
Ocado Within the Marketplace
Our Strategy
Our Strategic Objectives: Driving Growth
Our Strategic Objectives: Maximising Efficiency
Our Strategic Objectives: Utilising Proprietary Knowledge
Key Performance Indicators
Chief Financial Officer’s Review
How We Manage Our Risks
Corporate Responsibility
Our People
08
10
11
14
16
18
20
22
24
26
28
30
32
38
42
46
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Stock Code: OCDO | www.ocadogroup.com OUR BUSINESS
Model
Our business was established to revolutionise the way the world shops. Our commitment is to provide our retail and corporate customers with the best
proposition in online shopping utilising our proprietary, market leading technologies and innovations.
OUR INPUTS
People
Our business is built by colleagues
who innovate, find solutions,
and deliver world class service.
Our technology and engineering
development teams are crucial to
our ability to innovate at a rapid
pace, advance our intellectual
property and maintain technological
leadership.
Technology
Our technology estate is very broad
and deep, covering real-time control
systems and robotics, computer
vision systems, machine learning
and AI, data science, forecasting and
routing systems, inference engines,
the cloud, Internet of Things, big
data and more.
Intellectual Property
In order to retain our competitive
advantage from our technology
innovations we take careful
measures to protect our intellectual
property and inventions and file
multiple patent applications to
safeguard this. Our patent activities
are intended to create a web of
protection for our intellectual
property.
Financial
We use our financial capital to
proactively invest in our people, our
technologies and infrastructure to
ensure we remain a market leader.
Our model is monetised through two customer segments.
OCADO RETAIL
Our growing retail business encompasses both our Ocado.com webshop and
our general merchandise destination sites Fetch, Fabled and Sizzle. We also
have a small but growing wholesale operation currently for Morrisons and
Dobbies. Our compelling retail proposition allows customers to shop our
extensive product range at competitive prices and receive what we believe
to be industry-leading customer service levels. This helps drive customer
satisfaction and in turn growth within our business.
SIGNIFICANT PARTNERS
• Waitrose
• Marie Claire
SIGNIFICANT ASSETS
• CFC and spoke network
• End-to-end logistics platform
• Compelling and market-leading customer proposition in terms of service,
range and price
Loyal and growing customer base
•
• Operationally efficient and profitable model
• Trusted brand
• Strong relationships with a diverse range of suppliers
• Experienced and trusted leadership
THE PLATFORM
We continuously develop our complete modular, automated and
scalable online retail, fulfilment and delivery solution, called the Ocado
Smart Platform, to support our current and future Solutions partners.
The Ocado Smart Platform gives us the opportunity to grow and
continue to innovate to further disrupt our marketplace. As a result, we
are able to secure and sustain competitive advantage.
SIGNIFICANT ASSETS
• End-to-end e-commerce solution
• Flexibility within the platform to tailor to requirements of partners
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 OCADO SOLUTIONS
Ocado Solutions is the business where
we take our online know-how to retailers around the world. Leveraging our
proprietary best-in-class technology with the Ocado Smart Platform, and the
knowledge and experience of Ocado’s retail business, we aim to become the
e-commerce solutions partner of choice for leading retailers globally looking
to launch and develop their online operations.
SIGNIFICANT PARTNERS
• Morrisons
• Groupe Casino
• Regional European retailer
• Sobeys
SIGNIFICANT ASSETS
• Proven track record for powering successful online grocery businesses
•
• Growing sales team to help nurture and drive analysis and strategic
Innovative and market-leading technology and IP
conversations with partners
• Strong culture of innovation and out-of-the-box thinking
•
Insightful and continued dialogue with strategically aligned partners
INVESTMENT
GROWTH
INNOVATION
EFFICIENCY
Our Platform creates value through a virtuous
cycle. Read more on page 10
CREATING VALUE FOR:
Retail Customers
We offer a compelling proposition to consumers
including a highly attractive service, wider and
fresher ranges, and competitive prices.
Read more about Ocado Retail
on pages 16 and 17
Solutions Customers
Ocado Smart Platform, our end-to-end offering
of proprietary software and equipment solutions,
built and maintained by us, offers retail partners
a faster, flexible and more cost-efficient way of
operating online.
Read more about Ocado Solutions
on pages 18 and 19
Shareholders
As revenues grow from both our Retail customer
base and new Solutions customers, we will be able
to improve our profitability and reinvest in growth
and innovation, increasing shareholder value.
Read more about Our Platform
on page 10
Our People
We strive to make Ocado an employer of choice
and invest a significant amount of time and
resources in recruiting talented employees and
developing their skills.
Read more about Our People on
pages 46 and 47
Society
The Ocado Foundation helps our customers and
employees to make targeted actions at a local
level across the UK.
Read more in Corporate Responsibility
on pages 42 to 45
Environment
We are focused on continually improving our
carbon emissions and waste efficiencies. The
automation within our infrastructure enables
these efficiencies.
Read more in Corporate Responsibility
on pages 42 to 45
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THE PLATFORM
Strategic ReportStock Code: OCDO | www.ocadogroup.com OUR
Platform
Our objective is to create a virtuous cycle between growth, investment, innovation and efficiency. This is enabled by our platform, which utilises proprietary
knowledge to drive efficiencies, which, in turn, allow us to remove some of the significant costs incurred by store-based retailers. The resultant benefits allow
us to reinvest into our business and further drive growth.
INVESTMENT
We continuously invest in our people, our technologies
and our CFC capacity to ensure we maintain our market
leadership and competitive edge.
GROWTH
CREATING THE BEST
GROCERY SHOPPING EXPERIENCE
Our platform offers a superior shopping experience with high
order accuracy, minimal substitutions, fresher products due to
shorter supply chains, extensive ranges and competitive pricing.
This helps us retain and attract customers and in turn drives
growth within our business.
INNOVATION
CREATING THE BEST PLATFORM
At Ocado we have 17 years’ experience of creating new things
to make customers’ experience of shopping more convenient and
more exciting. Over this time, we have developed a unique end-to-end
operating solution for online grocery retail based on proprietary
technology and IP. We are focused on continuously enhancing the
platform and driving innovation within our business.
EFFICIENCY
Our platform utilises technology and automation to
ensure high levels of operational efficiency with, for
example, our low product waste, high stock turn, and high
product accuracy. Our proprietary technology and our IP
have allowed us to do this also with high capital efficiency.
OCADO RETAIL
CUSTOMER SEGMENT
Retail customers
VALUE PROPOSITION
• Market-leading service in terms of order
accuracy, on time delivery and ease of use
• Extensive range and fresher products
• Competitive prices and low delivery fees
OCADO SOLUTIONS
CUSTOMER SEGMENT
Retailers internationally looking
to build winning e-commerce
operations
VALUE PROPOSITION
• Our solutions are offered as an
end-to-end service, with fee structures aligning to
the growth of each partner
• As their online retail business grows our flexible
solutions can be scaled, driving cost efficiencies
Read more about Ocado Retail on
pages 16 and 17
Read more about Ocado Solutions on
pages 18 and 19
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 INNOVATION –
Developing solutions for all our customers
evolves and changes, but at the same
time balance workloads, performance
and resources in an efficient manner.
Our technology teams design and build
these systems to be highly available and
self-healing.
Discrete Event-Simulation
Simulation modelling is used at Ocado
for various warehouse operations.
Making highly optimal choices for
physical devices, layout and algorithms
is often beyond human capability, but
getting it right is extremely important for
any business. Companies can optimise
by trial and error in production (often
this is expensive, risky and slow) or they
can create software to identify highly
optimal choices. Ocado uses discrete
event simulation for this purpose.
This gives us deterministic, faster than
real-time scenario and soak testing,
allowing us to create systems that
would otherwise be too complex to test
and debug.
of shopping. Combining attractive
aesthetics with pioneering functionality
that offers unique ways to shop, we
have helped to create applications
which deliver an exciting, informative
and tailored experience – while using
intelligent technologies to remove the
complexity of keeping it all managed
and up to date.
Algorithms and Smart Optimisation
Our systems can make around four
million routing calculations per second.
Ocado’s systems continuously monitor
stock at the individual product level
and compute multiple sales forecasts
for every product in every warehouse.
Warehouse replenishment systems are
designed to automatically reorder stock
from suppliers within the constraints of
maximising product life and availability
to customers while minimising waste
and stock-holding.
Distributed Computing
Powering Ocado is a complex computing
estate that covers everything from
our webshop to our highly automated
warehouses. Our distribution systems
need to support the business as it
Innovation is part of our DNA and
with our investment to date, and our
continuing research into areas such
as artificial intelligence, robotics,
automation and big data, we have an
opportunity to create a sustainable
technological advantage in an
increasingly competitive market.
With everything from websites to
warehouses designed in-house, we
have developed capabilities across a
wide range of technologies.
AREAS OF DEVELOPMENT
Automation and Robotics
Warehouse automation within our centralised CFCs is one of the key
differentiators for Ocado in the online grocery retail market. Our most
ambitious and innovative project of this sort has been the design and
development of our proprietary ‘hive’ fulfilment solution, currently live
in our Andover CFC, which will involve thousands of robots working
together to retrieve from storage the groceries comprising a customer
order.
In terms of picking robotics, we have two ambitious Horizon 2020
Research and Innovation projects called SecondHands and SoMa
which combine state-of-the-art robotics, artificial intelligence,
machine learning and advanced sensors to understand and assist
human warehouse workers in real time.
For more information on this see the Development
in Robotics Case Study on page 13
Data Science and Artificial Intelligence
Machine learning is a core competency at Ocado. Artificial intelligence
is beginning to transform how customers and companies interact
with each other. Ocado uses machine learning to develop predictive
analytics, implement advanced monitoring and oversight, manage
our operations, and achieve real-time optimisation of services. Our
data science teams work on advanced projects using programming
languages, tools and frameworks in areas related to computer vision,
natural language processing and demand forecasting.
Big Data and the Cloud
We use advanced data analytics and cloud storage to deliver groceries
to more than 645,000 active customers. Our cloud and data teams
collect and process data from customer-facing websites, warehouses,
delivery vans and beyond to provide a more personalised shopping
experience to customers, optimise warehouse operations, empower
the supply chain, speed decision-making and reduce costs.
Web and App Development
Ocado was the first grocery supermarket to launch Android, iOS
and watchOS apps. With the move into a digital era, the retail sector
is becoming increasingly diverse and requires the strategic use
of applications to offer new immersive and interactive methods
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Strategic ReportStock Code: OCDO | www.ocadogroup.com INNOVATION –
Developing solutions for all our customers
CASE STUDY
OUR PROPRIETARY ROUTING ALGORITHMS
As we continue to grow our customer base, the routing algorithms
that underpin the efficiency of our last mile delivery become
increasingly complex. The algorithms must optimise the variants of
thousands of delivery drivers in different cities with numerous drop
destinations, with varying distances between them and calculate
the shortest possible route for each delivery driver to complete their
shift and end up back where they started. As we continue to grow,
the scale of this problem keeps expanding.
the route optimisation for Friday. The software is quick and efficient,
meaning that additions and revisions of delivery bookings can be
taken into account when calculating the best possible solution
within the time available. When you visit Ocado.com, the webshop
is actually communicating directly with our routing software to
establish which delivery slots are still available. When you click on
the day you wish to receive your delivery in the calendar, the real
time optimiser will return the available slots within 500 milliseconds!
The secret ingredient to our routing success is the broad range of
variables we take into account when calculating the cost function,
including van capacities, weights, volumes, fuel consumption and
even driver experience. The work of our technology team means
we regularly find ourselves in a position to solve our own problems
without outsourcing to third parties. The close collaboration between
our retail and technology teams continues to keep us a step ahead.
Since 2007, when we outgrew the capacity of third party routing
software, we have been using our internally developed proprietary
algorithms, which employ real-time optimisation to help us decide
which deliveries to assign to each van and the order in which they
should be completed, while also ensuring we do our best to arrive
on time for all our deliveries in time slots selected by the customer.
The algorithm makes several million route calculations per
second to identify the best delivery routes for our drivers. We have
continued to evolve our software over time so that we can assess
which scenarios are most efficient.
Our platform is constantly running multiple instances of the
optimiser simultaneously, each iteration focusing on a specific area
for a certain day. This means that a customer can book a delivery
slot online late on a Thursday night for delivery the following day,
and the software can make sure it incorporates this new slot into
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CASE STUDY
DEVELOPMENTS IN ROBOTICS
SOMA PROJECT
As part of our ongoing aim to lower costs and drive efficiencies
within our model we have been evaluating the feasibility of robotic
picking and packing within our CFCs through various initiatives,
one of these being the SoMa project, a Horizon 2020 framework
programme for research and innovation funded by the European
Union.
One of the main challenges of robotic manipulation has been the
handling of easily damageable and unpredictably shaped objects
such as fruit and vegetables. To avoid damaging sensitive items, the
project uses a compliant gripper (i.e. one that possesses spring-like
properties) in conjunction with an industrial robot arm.
The variation in shape of the target objects imposes another set of
constraints on the design of a suitable gripper. The gripper must
be sufficiently versatile to pick a wide variety of products, including
Ocado’s current range which includes over 49,000 hypermarket
items. The goal is to develop versatile, robust, cost-effective, and
safe robotic grasping and manipulation capabilities.
An example of a compliant gripper is the RBO Hand 2. The gripper
uses flexible rubber materials and pressurized air for passively
adapting grasps which allows for safe and damage-free picking
of objects. Our robotics team replicated a production warehouse
scenario in order to evaluate the performance of the RBO Hand 2 for
Ocado’s use case. The team mounted the soft hand on two different
robot arms.
We designed a set of experiments to evaluate grasping performance
on an example set of artificial fruit stored in a tray. The experiments
started with the simple scenario of grasping a single object. Results
illustrated that the hand is able to successfully grasp a variety of
shapes and provided us with insights on how to improve accuracy
and success of picking going forward. Over the year we have
continued to explore more complex scenarios, adding more objects
and introducing additional environmental constraints that could be
exploited by a grasping strategy.
OSPICK
More recently we have developed and trialled an alternative type
of picking station, called OSPick. OSPick is an industrial robot
designed to pick a range of groceries within our CFCs using suction.
The system is straightforward in concept compared to many other
industrial manipulation projects, but alongside this simplicity comes
flexibility. The robotic pick station consists of a suction cup on the
end of an articulated arm. The arm is equipped with a pipe running
to an air compressor, which is capable of lifting items regardless of
their deformability and shape. The biggest factors that influence the
success of a pick are the item’s weight and surface properties.
The future development and roll-out of this picking solution within
our CFCs should allow us to reduce the cost of fulfilment within our
operations and that of our commercial partners.
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13
Strategic ReportStock Code: OCDO | www.ocadogroup.com EVIDENCING
Efficiency Improvements
We utilise technology and innovation to drive efficiencies and consequently reduce cost throughout our business. The core design principles that drive efficiency
are automation, use of proprietary technology, and aggregation of scale via the use of our large CFCs. By combining these attributes we have been able to develop
the most sophisticated and operationally efficient grocery shopping and delivery solutions in the world.
Mature CFCs – Cash Generative
and Low Maintenance
New CFCs – High Return on
Investment from Better Capital
and Operating Efficiencies
Mature CFCs
CFCs Utilising Proprietary Solutions
Our two mature CFCs in Hatfield and Dordon continue to operate at high
levels of accuracy and with improved efficiency (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 have engineers constantly on site to ensure these CFCs are well
maintained and to improve the resiliency of our operations. Relative to their
sales capacity we therefore incur minimal maintenance capex, and we do not
expect this to change over the coming years. We calculate that the cash flow
return from our mature CFCs each year is nearly 10% of revenue, illustrating
the significant cash generation that can be generated once a CFC has scaled
and has reached maturity.
Our proprietary technology utilised in our newest CFCs enables us to achieve
an attractive return on investment, estimated at over 50% for our Erith CFC,
even before any further benefits that should come from other innovations
such as robotic picking.
Current Mature CFCs
Revenue*
Operating contribution (c.10%)
Annual capex
Annual cash generation
Cash generation as a % of revenue
* Represents Ocado only proportion of CFCs
(£m)
1,350
135
(5)
130
9.6%
Projected Erith CFC at full capacity*
Revenue
Operating contribution (11.6%)**
Invested capex
Projected ROI
(£m)
1,080
125
225
>50%
* Assumes 100% utilised by Ocado.
** Improved operating contribution due to higher expected CFC efficiencies and
improved delivery efficiencies from increased scale.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Wider Improvements to the Platform
Improvements in Efficiencies across the Retail Operation
Our proprietary technology and infrastructure have been developed in-house
and continuously improved over many years to optimise the efficiency of
our online businesses. This technology and infrastructure spans the entire
shopping and delivery life cycle from customer-facing interfaces, which power
our webshop, mobile and tablet applications, to improvements in our UPH
efficiency metrics within our CFCs to our optimised delivery routing for the
final mile service. Efficiencies within our operations enable us to constantly
improve our customer proposition, achieving what we believe to be industry-
leading customer service metrics in on-time deliveries and order accuracy.
Long-Term Improvement in Drops per Van (DPVs)
All of our delivery routes are optimised in real time using our proprietary
software and algorithms. These complex calculations have constantly moving
variables based on our customers’ choice of delivery slot, house location and
current order volumes. By carefully modelling these attributes, alongside the
benefit of our continued growth, which is primarily coming from increased
demand in our existing catchments so increasing the density of customer
orders, we have been able to drive long-term improvements in our DPV,
meaning we are continuously improving the efficiency of our assets.
Customer Loyalty
Providing a compelling proposition to consumers is critical to attracting new
customers to Ocado and to encourage loyalty and retention for future shops.
We constantly analyse and review our offering against the wider market and
focus on innovation in order to seek to stay ahead of our peers. Once our
customers have learnt to trust the Ocado proposition they become loyal. We
can see this in how our customers shop with us over time. Although there is
some natural shrink in customers acquired in any given year as people move
or family circumstances change, sales per customer group in each year of
acquisition are generally consistent or in some years even increasing. This
illustrates how much the value of our proposition means to our customers.
Retail Brand
As we have grown in scale so has the power of our retail brand to deliver
value to a wide range of stakeholders. We are continuously analysing and
developing our Ocado own-label products, with our typical customer basket
now including at least five of our Ocado own branded range. The strength of
our brand has seen us winning a number of industry awards throughout the
year, on both an individual product scale and wider industry level.
More information on Strengthening Our Brands
can be found on page 25
All numbers on this page are reported on a 52 week basis
MATURE CFC UPH*
1
2
1
:
0
1
0
2
1
1
1
:
1
1
0
2
0
2
1
:
2
1
0
2
5
3
1
:
3
1
0
2
5
4
1
:
4
1
0
2
5
5
1
:
5
1
0
2
0
6
1
:
6
1
0
2
4
6
1
:
7
1
0
2
* UPH is a four wall efficiency measure, relating to the average units
processed per labour hour across all processes within our CFCs
DROPS PER VAN PER WEEK
200
180
160
140
120
100
2010
2011
2012
2013
2014
2015
2016
2017
CUSTOMER COHORT VALUE OVER TIME
l
e
u
a
V
t
r
o
h
o
C
Time (years since first delivery)
Ocado firsts
We continuously strive to be a leader in the online grocery space, evidenced by
a number of first to market skills and applications to support our proposition.
Some significant examples of this are outlined below.
• First UK supermarket to launch voice-controlled grocery shopping through
our Amazon Alexa skill (2017)
• Trialled the UK’s first autonomous driverless grocery deliveries in
partnership with Oxbotica (2017)
• First online grocery application to be released on the Apple Watch (2015)
• First to launch a fully transactional application on the iPhone (2009)
Read the Developing voice-activated AI capabilities
for our consumers case study on page 29
Read the UK's first driverless grocery
delivery case study on page 27
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OCADO
Retail
We don’t just deliver shopping, we liberate our customers’ time. We
provide wider choice, save them money and free up their time to
spend on the important things in life – which are usually not found in
a supermarket. Powered by fresh thinking, we seek new and improved
ways to deliver exactly what customers order, exactly when they want
it, where they want it.
Our aim is to provide a market-leading proposition to our customers in
terms of range, service and price and we are constantly reviewing our
competitors to ensure we remain ahead of the game.
The Ocado Smart Pass helps drive customer loyalty by offering
customers free deliveries and specialised discounts on selected
products. This encourages customers to shop regularly at Ocado and
therefore drives sales through our platform. Over 70% of our sales are
now conducted through Smart Pass.
We recognise that customers shop in different ways, and aim to
provide flexibility within our proposition to ensure it is suitable and
convenient. Our service is supported across a variety of interfaces,
from the Apple watch to mobile and tablet applications, to ensure
customers can create and amend their orders on the go. We offer the
flexibility of one hour delivery slots, seven days a week from 5.30am to
11.30pm, ensuring our customers can find a convenient delivery time
to suit their schedules.
To enable easy shopping we analyse our interfaces and tools on our
webshops to support customers' shopping habits. For example, during
the year we launched our Ocado Regulars feature on our webshop.
This enables shoppers to select any product within our range and
incorporate it into their Regulars list so that it is automatically added
at a given frequency of their choice (e.g. weekly/monthly) to their
shopping list. This means that when they start their weekly shop at
Ocado their basket will already be populated with the items they
regularly buy and they can focus on what is special to them this week.
This subscription-style trend and way of shopping is likely to continue
over time with more and more products delivered automatically to us
based on what the ever more powerful AI engines around us working
out what we want and need.
Supported by market-leading technology and our centralised
fulfilment model we are able to ensure a consistent and superior
customer service with 95.0% on-time deliveries and 98.8% order
accuracy. Our outstanding customer service has been acknowledged
throughout the industry, and we recently were shortlisted for the
European Customer Call Centre Award.
We aim to operate a competitive and transparent pricing policy for
our customers. We price match our products to equivalent baskets of
the market leader, Tesco.com, and communicate any price variances
directly to the consumer with any negative variances refunded in the
form of vouchers.
We have continued to offer a broader range than the market, and now
offer over 49,000 SKUs on our Ocado.com webshop. This is far beyond
what a typical supermarket, which is limited by space constraints,
could provide. Alongside national brands, we stock our own and
Waitrose private-label products as well as niche and speciality brands
which would not typically be found in traditional supermarkets.
Within the year we have extended our
product range by adding new suppliers
and shop-in-shops such as Hotel
Chocolat and our vegan webshop
allowing customers to further extend
their shopping experience all on one
website.
Our proprietary software and
algorithms enable us to personalise
the shopping experience to individual
customers – displaying product ranges
most relevant to them based on prior
shopping history and preferences.
We work with all our suppliers on
how to best showcase their products
to their target audience and enable
greater visibility and prioritisation
for suppliers who wish to have it
through mechanisms such as banner
advertising, dedicated “shop-in-
shops”, and personalised coupons for
our customers. This helps target the
right customers and provides rich data
insight into shopping habits for our
suppliers.
Alongside our traditional grocery
range we also have a growing general
merchandise business which now
contributes over 7% of our retail
revenue A . This includes the kind of
traditional non-food categories you
would typically find in supermarkets,
which sit within our Ocado.com
hypermarket, as well as our specialist
destination sites: Fetch, our specialist
pet shop; Sizzle, our kitchen and dining
ware store; and Fabled in partnership
with Marie Claire, our premium
beauty store. Hosting these dedicated
destination sites drives the range of
products made available to us by
niche suppliers and brands, allowing
us to vastly extend our range beyond
that of conventional supermarkets.
All numbers on this page are reported on a 52 week basis
A
See Alternative Performance
Measures on page 196
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 WHERE WE OPERATE – OUR
LOCATIONS AND COVERAGE
We operate a hub and spoke delivery
network. We fulfil our orders through our
three CFC sites in Hatfield, Dordon and
Andover and plan to open our fourth
and largest CFC next year in Erith, South
London. Around a third of our orders
are delivered directly from our CFCs,
with the remaining being "trunked" to
our spoke sites, where the orders are
cross docked to local delivery vans and
distributed to the surrounding areas. We
have 17 spoke sites within our network
and currently deliver to over 74% of
UK households. Around a third of our
geography have same-day delivery slot
availability.
SUPPLIERS AND OPERATIONAL
PARTNERS
Our suppliers range from large national
brands to smaller, niche and speciality
players as well as offering our private
label selection to our customers. We
currently work with around 4,300
different suppliers to service our Ocado
hypermarket.
Since launching Ocado.com we
have enjoyed a long-term sourcing
agreement with Waitrose (part of the
John Lewis Partnership). Our current
contract runs to 2020. This combines
our respective product volumes and
growth profiles to improve supply
terms for both parties, and enables
us to sell Waitrose branded products
on Ocado.com. We pay Waitrose a
sourcing fee under the agreement
and deal directly with suppliers
for the majority of the range.
CFC SITES
1. CFC 1 – Hatfield
2. CFC 2 – Dordon
3. CFC 3 – Andover
4. CFC 4 – Erith (opening this year)
GENERAL MERCHANDISE
DISTRIBUTION CENTRES
A. GMDC 1 – Welwyn Garden City
B. GMDC 2 – Erith (opening this year)
SPOKE SITES
1. Leeds
2. Knowsley
3. Manchester
4. Sheffield
5. Oxford
6. Bristol
7. Peterborough
8. Weybridge
9. Wimbledon
10. Park Royal
11. Ruislip
12. Enfield
13. Dartford
14. Dagenham
15. Milton Keynes
16. West Drayton
17. Crawley
2
3
6
1
4
2
5
3
15
7
1
11
10
12
16
9
8
A
14
13
4
B
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Solutions
Ocado Solutions focuses on helping
retail clients grow their online businesses
profitably. Our objective is to understand
the problems our clients are facing and
provide modular, scalable, customised
solutions to meet their needs. Leveraging
our proprietary best-in-class technology
with the Ocado Smart Platform, and the
knowledge and experience of Ocado’s
retail business, we aim to be a long-term
partner to our clients, vested in their
success to become the e-commerce
solutions partner of choice for leading
retailers globally.
The strategic priorities of retailers vary
significantly across the world depending
on their scale, maturity and appetite
for change. Ocado Solutions aims to
provide bespoke, flexible capabilities
to our partners depending on their
requirements and the service they wish
to offer their customers.
Ocado Solutions will provide retailers
with the flexibility to customise the end-
to-end process to best fit their current
assets and strategic vision.
Starting with the front end, our
capabilities will allow retailers to build
best-in-class functionality across a
spectrum of interfaces from mobile
platforms to Alexa voice-activated
devices to ensure their customers
can shop in the most convenient way
for them.
From a fulfilment perspective,
customers can chose to operate a
centralised warehouse or via a store
picking solution. A centralised option
would utilise our market-leading,
proprietary physical infrastructure
solution and algorithms to enable
sustainable, operationally efficient
fulfilment on a larger scale. This solution
is modular in nature (can be built
to different sizes) and scalable (can
be increased in size over time), and
therefore can grow stage by stage as the
retailer scales their online operations.
OUR SCALABLE, MODULAR SOLUTIONS
Ocado powered
webshop
Tablet and mobile apps
Software powering
the site content and
algorithms for analysing
customer data
l
s
n
o
i
t
u
o
S
o
d
a
c
O
f
o
y
e
n
r
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o
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e
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T
Ocado powered
supply chain
Centralised
warehouse with
Ocado fulfilment MHE
Ocado powered store
pick software
Ocado powered
delivery process
Routing and in-van
technology
Potential for alternative
delivery methods such as
courier and click and collect
Although offering weaker economics at scale, the store
picking functionality allows retailers to fulfil orders
through their existing store estate, providing retailers
a quick to market and flexible fulfilment option to
service online customers. The store picking solution
is beneficial as it provides retailers with the option to
fulfil customer orders in catchments where it may be
uneconomical to have a centralised fulfilment centre,
but where it might be appropriate to move to more
efficient CFCs once sales volumes have scaled. These
fulfilment solutions are not mutually exclusive and can
be operated in conjunction with each other to enhance
the flexibility of our offering for different partners.
Finally, our Solutions business will have the potential
to support alternative last mile operations such as
delivery, click and collect and courier services. All
Solutions will leverage our proprietary technology – the
Ocado Smart Platform.
Our Solutions business allows partners to build and
scale their online operations at significantly lower
cost to alternative solutions. Partners will benefit from
using proprietary technology that has been trialled
and tested in our own Retail business, and that has
been designed with the complexities of grocery retail
in mind. To further enhance the customer proposition
for retailers, other products, applications or features
can be integrated alongside our Ocado Solutions
capabilities such as general merchandise, promotional
activities, or speciality range extensions. We would
expect these additional features to help increase
customer retention and drive growth.
Our Ocado Solutions business offers significant value
creation opportunities in the UK and abroad and
we are pleased with the progress of this business
segment in an exciting time for the industry. Looking
ahead, we are confident that we will be able to do
further deals with the momentum of new signings
building over time.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
MODULES CURRENTLY USED ACROSS OUR PARTNERS
MORRISONS
PARTNERSHIP WITH A REGIONAL EUROPEAN RETAILER
D
N
E
T
N
O
R
F
T
N
E
M
L
I
F
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L
I
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S
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E
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A
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N
I
I
S
N
O
T
A
R
E
P
O
The Morrisons partnership
utilises all of our Ocado Solutions
capabilities
Since launching our first
commercial partnership in
2014, Morrisons.com sales have
grown significantly. This further
demonstrates the quality of our
platform and its ability to provide
an attractive service for retail
customers. With Morrisons.com
now close to reaching its original
agreed capacity, we announced
an extension to our partnership in
June 2016 to allow them capacity
in our Erith CFC, enabling their
business to continue to scale
alongside customer demand. In
addition to this, we also agreed to
provide Morrisons with store picking
capabilities, where customer orders
are picked and packed directly
from their existing stores. Despite
expected weaker economics at
scale, this alternative picking
solution enables full geographic
coverage to areas where their
current centralised picking capacity
does not reach.
D
N
E
T
N
O
R
F
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N
E
M
L
I
F
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U
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L
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S
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P
O
business. The partner will initially
operate from a manual warehouse,
with the option to progress to a
full automation solution at a later
date. This agreement represents
a significant step in the evolution
of our business and delivery of
our strategy, demonstrating the
flexibility of our solutions.
This partnership will utilise
Ocado's software solutions
We announced our first
international partner for our
Solutions business earlier this
year. Under this agreement the
partner will have access to our
full software platform, know-how
and support services required to
build an efficient online grocery
GROUPE CASINO
SOBEYS
D
N
E
T
N
O
R
F
T
N
E
M
L
I
F
L
U
F
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L
I
M
T
S
A
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E
C
A
F
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N
I
I
S
N
O
T
A
R
E
P
O
The Groupe Casino partnership
will utilise our front end software
and interfaces, our centralised
fulfilment, and our last mile
delivery solutions
At the end of the year we were
delighted to announce our second
international partnership, with
Groupe Casino in France. Groupe
Casino is one of the world’s largest
and most respected multi format
and multi channel grocery retailers.
Under the agreement Groupe
Casino will gain access to the full
end-to-end Ocado Smart Platform
solution, including the construction
of our latest generation, state-of-
the-art automated warehouse,
Ocado's best-in-class front-end
website functionality, last mile
routing management and big data
and real time implementation.
Groupe Casino's banners will
benefit from our market leading
grocery e-commerce platform, firstly
through Monoprix.fr. The agreement
sets out plans for the immediate
initiation of the development
of a CFC using our proprietary
mechanical handling equipment
to serve the Greater Paris area, the
Normandie and Hauts de France
Regions. We expect this deal to
create significant long-term value to
the business.
The agreement provides exclusivity
benefits to Groupe Casino in France
as long as they continue to commit
to grow their online operations
over time. As well as some upfront
fees, which will enable Groupe
Casino’s systems and processes to
be integrated with the Ocado Smart
Platform, fees will be based on the
capacity utilisation within the CFC
and will scale as Groupe Casino grows
their online operations. The deal with
Groupe Casino is a major validation of
our business model.
will include best-in-class front-end
website functionality, supported
by Ocado’s proprietary ‘web shop’
and mobile grocery ordering
applications; construction of
Ocado’s latest generation, state-
of-the-art automated warehouse
designed specifically for grocery
e-commerce; and last mile routing
management technology to
optimize delivery truck efficiency,
customer service excellence and
punctuality. Sobeys and Ocado will
develop their first CFC in the Greater
Toronto Area. The build is expected
to take approximately two years. In
addition to this initial CFC, Sobeys
and Ocado will consider developing
other CFCs in Canada’s dense
urban areas. Sobeys will pay Ocado
certain upfront fees upon signing
and during the development phase,
then ongoing fees linked to installed
capacity within the CFC and service
criteria.
D
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E
C
A
F
R
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I
I
S
N
O
T
A
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P
O
The Sobeys partnership will
utilise our front end software
and interfaces, our centralised
fulfilment, and our last mile
delivery solutions
At the beginning of 2018 we were
pleased to announce the signing
of an agreement with Sobeys to
partner with Ocado Solutions
to develop an online grocery
business in Canada using the
Ocado Smart Platform. Sobeys
is Canada’s second largest food
retailer, operating more than 1,500
stores across the country, and
generating sales of C$23.8 billion
in fiscal 2017. Ocado will partner
exclusively in Canada with Sobeys
to launch their end-to-end solution
for online grocery services. This
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OCADO
Within the Marketplace
UK GROCERY MARKET SIZE
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2018
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Market value (£bn)
Source: IGD
THE UK GROCERY MARKET
IN 2017
GROWTH IN THE UK GROCERY
MARKET BETWEEN 2017 AND
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Source: IGD
Source: IGD
UK GROCERY 2017 TOTAL SALES GROWTH
15
12
9
6
3
0
-3
-6
)
%
(
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t
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Source: IGD, Company data
Read more about Ocado Retail
on pages 16 and 17
20
RETAIL
The UK Grocery Market
Grocery is the largest of all retail
segments and in the UK is forecast to
grow by 15% over the next five years
from £185 billion to £213 billion (IGD).
Alongside this substantial growth, the
UK grocery market is going through
a period of adaptation as the UK
Government negotiates Brexit. This
has accelerated the need for grocery
retailers to look to ways to maximise
efficiency and reduce costs within their
operations to sustain profitability
and further invest in their customer
proposition.
Price and Cost Dynamics
After several years of ongoing price
deflation within the grocery market we
have seen the return of inflation, driven
by retailers adjusting pricing following
the fall in the value of sterling after the
EU referendum.
Opposing this, the market is
experiencing labour cost inflation
driven by a rise in the national living
wage combined with a tightening of the
labour market as some EU residents
return to their home countries in the
wake of sterling’s decline. This will
impact retailers across the UK and is
likely to put pressure on margins.
The Shape of UK Grocery
The grocery landscape is changing
rapidly, most significantly through the
online channel. IGD forecast that over
the next five years the online share of
the market will rival hypermarkets at
close to £16 billion. Its growth is being
fuelled both by innovation from existing
players and by new market entrants.
This distinctive shift in consumer spend
makes it essential for retailers to rethink
their format structures and priorities.
Alongside online, IGD predicts
continued significant growth from the
hard discount sector which attracts
and retains customers through deep
discounts on a limited range of
products. This places intense pressure
on margins as established national
chains adjust their pricing propositions
in an attempt to differentiate and
compete. In addition, some food
retailers have attempted to sustain
profitability in growth by investing in, or
merging with, companies in other retail
segments.
Across the industry we are seeing
shoppers lead increasingly digitally
dependent lives. It therefore becomes
more vital to harness technology to
improve the customer experience in a
competitive market both online and
in stores. We are seeing an increase in
innovation, ranging from electronic in-
store pricing to voice activated grocery
ordering, to support this trend and it is
becoming an important differentiator in
managing costs and enhancing loyalty
across the industry.
Impact on Retailers
Given the low margins in the industry,
retailers need to be cost efficient and
behave rationally when deciding
strategic priorities on price, proposition
and channel offering.
Regarding online, we have started to
see changes as retailers re-examine
their online propositions and focus on
profit and sustainability over short-term
growth.
The size of the grocery market results
in significant opportunities for
retailers and throughout the industry
we are seeing a continued focus on
the customer proposition through
differentiated formats, technology and
service levels.
WHAT THIS MEANS FOR OCADO
We continue to grow in excess of the
UK grocery market enabling operating
leverage and stronger margins to
reinvest into our proposition and
remain an innovator within the market.
Being a pure-play online retailer we are
well placed to take advantage of the
ongoing channel shift. As other retailers
step back to readdress their offer, we
continue to build capacity and capture
market share. Our growth enables
us to further invest in our industry-
leading technology and IP to ensure we
maintain our competitive edge.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
SOLUTIONS
The Global Grocery Market
By 2021 IGD estimates that the global
grocery retail market will expand by $2.4
trillion driven by growth in population and
wealth, providing sustainable and attractive
opportunities for retailers. In some regions,
most notably Asia and the Middle East,
we are seeing this growth also driven by
significant inflation. Europe and North
America combined will account for 38%
of the share of total grocery sales by 2021,
highlighting the continued importance of
these regions globally.
The Changing Shape of Global Grocery
Outside of a few regions, online grocery is
still too small to be disruptive. However, as
we see the continued adoption of technology
on a global scale, as well as new competitors
entering the market, we are seeing
e-commerce strategies shift up retailerʼs
agendas.
Online penetration in grocery has lagged
other retail segments due to the complexities
of fulfilling food online given the number of
products that typically make up an order and
the variety of temperatures they require to
keep fresh. Globally, we see online grocery
penetration most pronounced in regions
where overall online shopping is highest
such as South Korea and Japan, indicating
the direction of travel for other regions as we
enter an increasingly digitalised era.
During the year we saw significant moves
by Amazon to grow its presence in grocery
retailing, including the launch and roll-
out of Amazon Fresh into new regions,
development of their Amazon Pantry and
Prime Now offerings, and, most importantly,
the acquisition of Whole Foods Market
with 471 supermarkets in the US and UK.
This significant industry development
highlighted the company’s strategic priorities
and provided the retailer with vital grocery
credentials to complement and accelerate its
ambitions in online grocery. The global reach
and technical prowess of Amazon has caused
retailers globally to re-examine the strategic
importance of their own e-commerce
propositions.
Impact on Retailers
As the online channel continues to grow
this presents both a huge opportunity and
a significant challenge for grocery retailers
who must now determine which channels to
invest in to best retain their customers and
continue to grow profitably in an increasingly
competitive market.
The Market for Online Grocery Solutions
There are several options for retailers looking
to invest in their online proposition, and the
route retailers choose will depend on their
perception of potential market size, internal
capabilities and strategic positioning.
Some retailers have chosen to develop
their capabilities in-house through a
variety of options including store picking
capabilities, click and collect sites, and the
construction of dark stores. This has been
done either by purchasing or developing
a variety of software solutions including
front-end interfaces, supply chain forecasting,
warehouse management software and routing
algorithms.
Others have chosen to use one of the
increasing number of e-commerce solutions
providers, hosting a variety of services to
enable retailers' online propositions.
Popular solutions include Instacart and
Shipt which provide a full solution to the
retailer by using crowdsourced labour to
pick and deliver the retailer’s products to
the customer, although sometimes retaining
the customer data. The challenge with most
of these solutions is that they result in high
processing costs per order and face service
challenges such as poor product availability.
Retailers looking to service a more significant
online market may migrate from a store
picking solution to larger, centralised sites,
most commonly known in the industry as
dark stores. Dark stores are not open to the
public and range from being purely manual
facilities to utilising physical equipment
provided by third party logistics firms in other
retail segments.
The complexity of online grocery makes
profitable online fulfilment challenging, and
the development of sustainable solutions
is essential to ensure continued long-term
growth for retailers.
WHAT THIS MEANS FOR OCADO
Our Solutions team aims to leverage our industry-
leading capabilities within online grocery to capitalise on
opportunities arising from the ongoing channel shift across
the world.
Through our years of experience within grocery e-commerce
we have developed modular, scalable and customisable
solutions to meet retailerʼs e-commerce needs. Utilising our
flagship product, the Ocado Smart Platform, we believe
we can help grocery retailers globally launch and develop
industry leading online propositions to their customers,
further accelerating channel shift.
To read more about our Ocado Solutions
business see pages 18 and 19
ONLINE GROCERY PENETRATION
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
%
9
.
6
K
U
%
2
.
7
n
a
p
a
J
%
3
.
5
e
c
n
a
r
F
%
2
.
5
n
a
w
a
T
i
%
2
.
4
i
a
n
h
C
%
0
.
0
1
a
e
r
o
K
h
t
u
o
S
%
7
.
1
i
n
a
p
S
%
4
.
1
A
S
U
%
7
.
1
y
n
a
m
r
e
G
%
7
.
1
s
d
n
a
l
r
e
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t
e
N
%
1
.
2
c
i
l
b
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R
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e
z
C
%
9
% 0
.
0
.
1
l
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g
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t
r
o
P
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m
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g
e
B
l
%
4
.
0
y
l
a
t
I
%
1
.
0
l
i
z
a
r
B
Source: Citi Research, Korea Statistics Office, Kantar
ECONOMIC INDICATORS POINT TOWARDS GROWTH
300
250
200
150
100
Regional GDP – US$ billions
Base year 2011–100
Constant $ rate 2011
Africa
Asia
Middle East
Latin America
World
Oceania
North America
Europe
2011
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: IGD Research, IMF
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21
Strategic ReportStock Code: OCDO | www.ocadogroup.com
OUR
Strategy
“The last twelve months have been
transformational for Ocado. We
have primed our Ocado Solutions
business for growth and received
an important validation of the
business model through our latest
partnerships with Groupe Casino
and Sobeys. Looking ahead,
we are confident that we will
be able to do further deals with
the momentum of new signings
building over time.
At the same time, our unrelenting
focus on our customers in the
UK has delivered 12.4% growth
in retail revenue A and further
significant market share gains as
well as a 4.6% increase in Retail
EBITDA A . We have ramped up
capacity in our revolutionary CFC
at Andover, which opened at the
end of 2016, and prepared the way
for the opening of our fourth CFC,
in Erith, this year.
Now is the time to take advantage
of our growth opportunities. We
will invest to ramp up our new
solution in both Erith and Andover
and to have the right resources in
place to meet growing demand
for the Ocado Solutions offer. We
believe that taking advantage of
these opportunities now will make
our virtuous cycle turn faster in the
years ahead and we expect that
to translate into higher returns
on capital. We look forward to
our future opportunities and
challenges”.
Tim Steiner
CHIEF EXECUTIVE OFFICER
22
Powered by fresh thinking, we strive for new and improved
ways to deliver the world’s most advanced end-to-end online
shopping and delivery solutions.
Our strategy is centred on our three key strategic objectives of driving growth, maximising efficiency and
utilising proprietary knowledge. In order to achieve these objectives we structure our business to operate
through five core actions. This enables us to deliver market-leading innovations within the grocery industry and
shape the market of the future.
Strategic Objectives
DRIVING
GROWTH
Continually enhancing the value of our
proposition for our retail and corporate
customers.
Read more about Driving Growth on
pages 24 and 25
MAXIMISING
EFFICIENCY
Harnessing our years of learning, we
continually strive to innovate and develop
our technology and operations to improve
our economic and operating performance.
Read more about Maximising Efficiency
on pages 26 and 27
UTILISING
PROPRIETARY
KNOWLEDGE
Utilising our IP to create sustainable
competitive advantages in our Retail and
Solutions businesses.
Read more about Utilising Proprietary
Knowledge on pages 28 and 29
All numbers on this page are reported on a 52 week basis
A
See Alternative Performance
Measures on page 196
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Actions
IMPROVE PROPOSITION
TO CUSTOMERS
STRENGTHEN
OUR BRANDS
DEVELOP MORE CAPITAL AND
OPERATIONALLY EFFICIENT
INFRASTRUCTURE SOLUTIONS
•
•
For our retail customers, this is centred on
continuous focus on the three core pillars of our
proposition to customers – service, range and price
• Develop and expand brand offerings to
appropriate retail and corporate customer
groups
• Operating efficiency: Optimise every aspect of
the fulfilment and delivery life cycle to improve
our economics and our customer proposition
For our corporate customers, it is embedding the
improvements and innovations from our retail
proposition into our platform capabilities with
other requirements specific for bricks and mortar
retailers to enable flexibility in our offering for our
partners
Read more about Improve Proposition
to Customers on page 25
• Reinforce brand equity and values to existing
• Capital efficiency: Continuously lower the
customers
Read more about Strengthen Our
Brands on page 25
cost of investment required for online grocery
activities to support growth in our own Retail
business and those of our Solutions partners
Read more about Develop More Capital
and Operationally Efficient Infrastructure
Solutions on page 27
ENHANCE END-TO-END
TECHNOLOGY SYSTEMS
ENABLE CURRENT AND FUTURE
PARTNERS’ ONLINE BUSINESS
• Be the best in the world by constantly evolving
• Continuously develop and enhance our
and innovating
• Use the developments of Ocado’s technology
and engineering teams to innovate and
improve our end-to-end solutions
Read more about Enhance End-to-End
Technology Solutions on page 29
e-commerce solutions to enable a compelling
customer proposition and competitive
economics to add significant value for partners
Read more about Enable Current and
Future Partners' Online Businesses on
page 29
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23
Strategic ReportStock Code: OCDO | www.ocadogroup.com OUR STRATEGIC OBJECTIVES:
Driving Growth
GROCERY
The loyalty and retention of our customers is a priority within our Retail
business as it helps drive growth and capture market share. We aim to
provide a best-in-class retail experience by analysing and constantly
improving every element of the consumer shop through the quality of
our service and our user interfaces, the freshness of our products, the
breadth and availability of range, and the competitiveness of our prices.
Progress
In a very competitive grocery market we have seen another year of
consistent growth within our Retail business of 12.4%, constrained by
capacity utilisation in our mature CFCs. Combined with this we have
continued to grow our order volumes by 14.3%, with double digit
order growth even in our most highly penetrated catchment areas.
We are constantly looking at ways to reduce friction within the
customer experience and during the year we were the first UK grocery
retailer to launch a voice-activated AI capability to allow customers an
alternative method to add or amend their Ocado order.
For more information on our Alexa skill
see the Case Study on page 29
Future Focus
Powered by technology, our retail proposition is the heart of our
business. We are committed to pushing the boundaries within online
shopping and fulfilment to ensure we provide the best proposition to
our customers.
The grocery market is changing rapidly and we are constantly
analysing and assessing new opportunities within the industry.
Be this new food trends, speciality brands or interface features, the
agile nature of our business means we are able to react quickly to
provide the consumer with what is important and valuable to them.
GENERAL MERCHANDISE
Our centralised operating model has enabled us to expand our
offering beyond what would typically be found in a supermarket.
In conjunction to the general merchandise products sold on our
Ocado.com hypermarket we operate three speciality destination
sites. These include Fetch, our speciality pet store; Sizzle, our kitchen
and dining store; and Fabled, in partnership with Marie Claire, our
premium beauty offering.
Progress
We have seen strong growth of our general merchandise division of over
34% over the year, driven by significant growth from our destination
sites. General merchandise continues to gain share within our customers’
baskets and now accounts for over 7% of our retail revenue A .
During the year our general merchandise division also signed a
partnership agreement with Dobbies Garden Centres to provide online
services to support the launch and growth of their online operations.
Powered by our technological and logistical know-how, it is an
agreement that demonstrates the transferable nature of our capabilities
into other retail segments outside of grocery. This agreement with
Dobbies adds to our partnership to wholesale general merchandise
products for Morrisons.
A
See Alternative Performance
Measures on page 196
All numbers on this page are reported on a 52 week basis
24
We continue to support the significant
growth of our first Solutions partner,
Morrisons.com, and this year launched
the first instance of our store picking
functionality with them. Throughout the
year we continued to scale operations at
our latest CFC in Andover. This is the first
instance where our proprietary physical
infrastructure solution is in use and
provides a live example of the physical
equipment platform to which our
Solutions customers would have access.
Future Focus
As the channel shift continues across
the globe, we believe we are well
positioned to act as a market leader
within online grocery. The latest deals
with Groupe Casino and Sobeys provide
major validation of our business model.
We expect to do multiple deals in the
medium term in a variety of geographies
with the momentum of new signings
building over time.
Future Focus
The flexibility of our centralised model
allows us to support range extension to
other retail categories without significant
capital investment and we continue to
review other retail segments to identify
further opportunities to capitalise on this.
SOLUTIONS BUSINESS
As we grow and continue to innovate
within our Retail business we incorporate
our innovations to our Solutions business.
Technological advances are tested within
a live retail environment on Ocado.com
and naturally become part of the platform
capabilities which we are able to offer to
our current and future partners.
Progress
We are delighted to have signed three
international partnerships, with Groupe
Casino, Sobeys (signed in early 2018)
and a regional European retailer, to
utilise our Ocado Smart Platform to
help launch and develop their online
operations.
KPIS:
263,000
Average orders per week
£107.2
Average order size
645,000
Active customer base
49,000
SKU count (Hypermarket)
3
Number of Ocado Solutions
Partnerships signed
RISKS:
• Risk of decline in high service levels
• Failure to develop retail proposition to appeal to broader customer
base and sustain growth rates
• Failure to develop sufficient management and technology capability
or bandwidth to deliver on all our strategic priorities
• Risk of not signing multiple Ocado Solutions deals in the medium
term and not being able to execute effectively
• Risk of negative implications caused by final Brexit terms such as
increase in import costs or difficulty in hiring employees
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 PRIMARY STRATEGIC ACTIONS
IMPROVE PROPOSITION
TO CUSTOMERS
CASE STUDY
OUR PROPRIETARY ʻBOTSʼ
A priority within our business is to offer a superior proposition to our
customers, which we believe is key to driving growth for both our
Retail and Solutions businesses. From a retail perspective, we focused
on improving each of the core elements of our customer proposition –
providing excellent customer service, an extensive range of products,
and offering competitive prices.
Our order accuracy and orders delivered on time or early remained
at what we believe to be industry-leading levels of 98.8% and 95.0%
respectively.
We continue to utilise our technological leadership to enhance the
ways in which customers can shop, integrating capabilities such as
the Alexa voice-activated interface for Ocado.com to provide our
customers with the freedom and flexibility to easily navigate and
complete their weekly shop through an even greater variety of devices.
Any innovation developed within our retail business will in turn benefit
our Solutions partners, who too will have access to these features for
their own online operations.
We have seen strong growth within our General Merchandise product
sales, including those from our destination sites, which have grown
at over 34% year on year, and now contribute over 7% of Ocado retail
revenue A .
STRENGTHEN
OUR BRANDS
Our continued focus on providing a best-in-class proposition to our
customers helps reinforce our retail brand. The quality of our service
has been recognised across the industry and was evidenced by
awards such as Best Organic Online Retailer at the Best of Organic
Market Awards 2017.
We have seen robust growth in both our active customer base and
total order volumes, which have continued to expand by 11.2% and
14.3% respectively, with the highest number of orders delivered in a
week exceeding 296,000 during the period.
Our Ocado Solutions brand has gained significant traction throughout
the year having signed our first three international partnerships. The
announcement of these agreements has not only provided validity to
our model but has helped us build momentum to support the brand
for future partnerships to come.
Although not specific business segments, we have been active in
promoting the strength and values of our Ocado Technology and
Engineering brands. This focus ensures we are able to recruit the best
talent to develop the most innovative technology for use within our
business.
An essential part of our new proprietary infrastructure solution,
which enables growth within our business, is the robotics required to
transport products and orders around the hive infrastructure within
our new CFCs.
Designed and developed in-house, with the complexities of grocery in
mind, these ‘bots’ are a crucial element within our solution that helps
drive the efficiencies required to fulfil groceries online. The bots are
required to move across a densely packed grid at a speed of up to 4
metres per second, collaborating with each other to collect groceries
stored beneath them and then bring them to a human picker.
A vital element of their success is their ability to communicate with
each other so as to avoid collisions and ensure all fulfilment is
optimised in real time. Ocado worked with Cambridge Consultants to
help develop a proprietary solution that allowed thousands of bots
to communicate with each other 10 times a second within a 50 metre
radius, a solution believed to be the most densely packed mobile
network in the world.
The bots also have the capabilities to transmit information on
how they are operating, and are able to self-diagnose if they are
overheating or not working properly. This allows them to report back
to maintenance to avoid damage and breakdowns upon the grid.
The bots are battery powered. The average energy consumption per
robot is only about 200 watts, which is bolstered by regenerative
braking. The power pack itself is about the size of a car battery and
features a cell chemistry that lets it charge up in less than half an hour
and run for several hours.
Through our years of ongoing development and testing we have
developed the robotics and infrastructure that can cope with quickly
picking and storing goods in a highly dense and scalable manner,
ensuring our solutions are flexible for our own as well as our retail
partner's fulfilment needs.
At capacity we expect our Andover CFC
to house around 1,100 bots of this
kind, and at Erith we would expect
over 3,500 bots at full scale.
All numbers on this page are reported on a 52 week basis
A
See Alternative Performance
Measures on page 196
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25
Strategic ReportStock Code: OCDO | www.ocadogroup.com OUR STRATEGIC OBJECTIVES:
Maximising Efficiency
OPERATIONAL EFFICIENCY
We ensure efficiency is optimised throughout our business by adhering to
our core design principles of automation, use of proprietary technology,
and centralisation – the culmination of these three elements being
evident in our industry-leading CFCs.
We seek to drive efficiency throughout every process in our operations,
from our easily navigable customer facing interfaces through to our
industry-leading routing software supporting the complexity of our
delivery operations.
Efficiency within our operations allows us to operate with what we
believe to be the lowest product waste in the industry of 0.7% of retail
revenue across our mature CFCs which are working at scale, despite
over-indexing within fresh and chilled categories. We are able to achieve
this through removing several processes and consequently human
touch points you would typically find in grocery retailing and using
our extensive data volumes from being a digitally centred business to
operate complex stock management systems to enable perfect “first-in-
first-out” stock rotation.
Progress
We continually strive to improve efficiency within our business and
achieve operational leverage as we grow. The operational efficiency
within our CFCs is quantified by units processed end-to-end per
labour hour, and we are pleased to report our overall mature CFC
Units Per Hour (UPH) for the year has improved from 160 to 164, again
showing how we are able to improve efficiency year-on-year. Further
improvements in UPH are now largely going to come from the MHE
solution in our new CFCs when they become mature.
Throughout the year we have scaled our latest CFC in Andover, which
houses the first utilisation of our proprietary physical infrastructure
solution. The fundamentally different solution design within Andover
will drive further UPH progression and in turn capital efficiencies
throughout our business once operating at scale.
Alongside efficiencies achieved within our CFCs, we also seek to
optimise efficiency in our last mile operations. Increased demand within
our catchment areas combined with improvements in our proprietary
routing software and in our operational practices have allowed us to
further optimise our delivery network enabling us to increase our DPV
from 176 to 182 over the year. Operational efficiencies achieved in
our retail business can be packaged and replicated for our Solutions
customers to enable sustainable and long-term e-commerce solutions.
Future Focus
Our latest solutions currently housed in Andover, and being installed in
our Erith CFC, were designed with the future in mind. We have developed
our physical infrastructure solution in such a way that any manual touch
points within the densely packed fulfilment infrastructure are located
on the periphery of the structure so that they can be retrofitted with
robotics and automated technology as and when these are appropriately
developed. We will be installing the first robotic picking stations within
our Andover facility. These robotic arms will be positioned at certain pick
stations equipped with our proprietary systems which will enable them
to see and feel a wide variety of products. With these capabilities our
robots can help pick customer orders much more efficiently, reducing
burdensome work hitherto done by humans.
All numbers on this page are reported on a 52 week basis
26
to build into smaller spaces rather
than being restricted to larger, out of
town, warehouse facilities. This makes
our capabilities more flexible and
customisable to the varying capacity
requirements of our Solutions partners.
Progress
Since 2015 we have been developing
our fourth CFC in Erith, South London.
This will be our largest and, we expect,
most capital efficient warehouse to
date, capable of handling over 200,000
orders per week which is equivalent
to around £1.2 billion of sales at full
capacity. We expect first orders from this
CFC to begin in 2018. Utilising the same
proprietary infrastructure and software
solutions as our Andover facility
(designed to deliver 65,000 orders per
week at scale, or £350 million of sales
at capacity), this demonstrates the
scalability of our end-to-end solution.
As our customer base expands we
will continually look to innovate
and improve our technology and
infrastructure solutions to ensure
operational excellence in every aspect
of the fulfilment and delivery life cycle.
CAPITAL EFFICIENCY
As we grow and in turn develop new
CFCs we have been able to improve the
capital efficiency of our operations. We
have achieved this through continuous
improvement within our mature CFCs,
which has allowed us to extract additional
capacity out of these facilities without
significant investment. At the same time
we have been investing in technology and
innovation, allowing us to build our own
proprietary infrastructure and software
solutions.
Our proprietary MHE solution, which
is now operational in Andover, is
modular (can be built to different sizes)
allowing for reduced upfront capital
commitment as the peripheries can be
added as volumes scale within each
facility. The modularity of our new
solution also means that we are able
98.8%
Order accuracy
182
Deliveries per van
per week
KPIS:
95.0%
Delivery punctuality
164
Mature CFC efficiency
(UPH)
0.7%
Product waste
RISKS:
• A risk of delays in the implementation of new capacity for both Ocado
and Morrisons
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CASE STUDY
THE UK'S FIRST DRIVERLESS
GROCERY DELIVERY
In June this year we concluded a successful driverless grocery
delivery trial in partnership with the GATEway Project, an £8 million
research project led by TRL in collaboration with Oxbotica, Digital
Greenwich, Telefonica and others.
The two week trial involved the electric self-driving van, called
CargoPod, which delivered free groceries to local residents in
Greenwich, South East London. The van itself is the first Oxbotica
self-driving electric vehicle capable of transporting cargo by using the
company’s state-of-the-art Caesium cloud-based fleet management
software and their Selenium autonomous control system.
Representing Ocado in this trial was our 10x technology team. The
10x team focuses on creating game-changing improvements that
have the potential to revolutionize our business based on the ten
times versus ten per cent principle. This involves identifying and
addressing the big technical challenges facing our business, the
online grocery market, and beyond. This ambitious goal demands
that the 10x team stays at the cutting edge of technology, looking far
into the future, and turning ambitious dreams into practical solutions.
The trial gave Ocado the ability to experiment with fresh ideas for
the last mile of online retail – the stage that starts when the goods
leave the facility for delivery and ends when they are placed securely
in the hands of customers. We were also able to learn more about
the next steps needed before driverless deliveries could become an
efficient proposition for our own Retail business as well as our Ocado
Solutions partners.
Future Focus
Due to the fundamentally different infrastructure within our latest CFCs
we are in the process of improving the reliability and resiliency of this new
solution. We expect future iterations to be faster to deploy (shorter build and
commissioning lead times) allowing for reduced upfront capital commitment.
As we develop and learn through the progression of CFCs we expect to be able
to further advance our capital efficiency increasing the benefits of operating
our centralised model in comparison to alternative methods. Any benefits
realised in our own retail business will be naturally passed on to our Solutions
partners.
PRIMARY STRATEGIC ACTIONS
DEVELOP MORE CAPITAL AND OPERATIONALLY
EFFICIENT INFRASTRUCTURE SOLUTIONS
.
Our two mature Customer Fulfilment Centres in Hatfield and Dordon
continued to operate to high levels of accuracy and with improved
efficiency (we consider a CFC to be mature if it has been open for 12
months by the start of the half year reporting period). Using the units
per labour hour efficiency measure ("UPH"), the average productivity
for the period in these operations was 164 UPH (2016: 160 UPH). We
expect most of the future improvements in CFC efficiency to now come
from our newer CFCs once these are operating at scale.
Throughout the year we continued to build reliability and
resiliency at our newest CFC in Andover, Hampshire, which houses
the first installation of our new proprietary modular, scalable
physical fulfilment solution. At capacity our Andover CFC will add
approximately 65,000 OPW of capacity at maturity.
We made excellent progress over the year in the development of our
fourth CFC in Erith, south east London. We continued to install the
physical infrastructure and plan to commence operations in FY2018.
We expect the facility to, be our most capital efficient CFC to date,
enabling us to efficiently expand our UK capacity and benefit future
Ocado Solutions customers through attractive deal economics.
Similar to our Andover CFC, this CFC will also use our proprietary
modular, scalable fulfilment solution which will enable us to phase
our investment over time in line with our capacity requirements.
Approximately 30% of the Erith CFC capacity will be utilised for
Morrisons.com under an extension agreement that was signed in 2016.
Further enhancements to our routing system, increased availability
of Sunday delivery slots and improved customer density enabled by
growth led to an improvement in average deliveries achieved on a van
route and has helped us increase deliveries per van per week across all
shifts (“DPV”) to 182 (2016: 176).
All numbers on this page are reported on a 52 week basis
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27
Strategic ReportStock Code: OCDO | www.ocadogroup.com OUR STRATEGIC OBJECTIVES:
Utilising Proprietary Knowledge
PATENTS
To ensure we protect the value of our
solutions and maintain our competitive
advantage within the space we take
careful measures to protect our
innovations and intellectual property.
We operate a structured and thorough
patent filing and application process
to safeguard our solutions. Our patent
activities are intended to create a web of
protection for our intellectual property.
As of the year end we filed patent
applications covering 61 separate
innovations. There are now 13 granted
patents across 8 innovation families.
Progress
We continue to file patent applications
to protect our proprietary knowledge.
Over the year some of our earlier filed
applications have been granted and we
expect many more to be granted over
the next year. As our OSP solution and
other technology evolves we expect to
continue protecting our innovations in
major markets in this way.
Future Focus
Our aim is to continuously innovate
ahead of the market and maintain our
industry leadership. We will ensure this
by continuing to innovate and protect
our intellectual property through our
ongoing patent operations.
RISKS:
• Technological innovation supersedes our own and offers improved
methods of food distribution to consumers
• Protecting our IP
•
Infringing a third party’s IP
OUR INTELLECTUAL PROPERTY
Making online grocery attractive to the customer and profitable for
the retailer is very challenging. Elements such as large basket sizes,
varying temperature requirements and narrow one-hour delivery slots
add to the complexity of our solutions and heighten the barriers to
entry within the sector. Our years of learning and development have
enabled us to build market leading solutions and valuable intellectual
property, which will enable our sustainable and long-term success
within the sector.
Our capabilities span our proprietary processes, physical
infrastructure solutions, systems and software to provide a complete
end-to-end solution to benefit both ourselves and our future
commercial partners.
Progress
Within the year we launched the first live instance of our store picking
solution with Morrisons.com. Despite expected weaker economics at
scale, this alternative picking solution can enable fuller geographic
coverage to areas where centralised picking may not reach. It is
complementary to CFC fulfilment and enables retailers to utilise their
existing store estate to build online sales volume that could later
be transferred to more efficient CFCs. It also enables us to provide a
quick to market and more flexible solution to our retail partners.
To maintain our technological leadership we have continued to build
capabilities within our technology teams, now constituting over 1,100
employees across our technology hubs in the UK, Poland, Bulgaria
and Spain. We are able to attract and retain quality technology
expertise by continuously pushing the boundaries in online
grocery and providing the team with the mandate to think beyond
conventional grocery issues.
Our developments and innovation throughout the year have been
considerable. Our IP is core to our technological leadership and our
progress illustrates our vision and determination in remaining ahead
in an increasingly competitive market. Our achievements have been
recognised throughout the industry and we have won numerous
awards such the Best Innovation in Cloud Services award during the
Ovum On The Radar Awards 2017.
Read more about significant innovations over the year in the
Innovation – Developing solutions for all our customers on
pages 11 to 13
Future Focus
Our innovations within the grocery and wider e-commerce space drive
growth and create long-term shareholder value. We are confident in
our ability to commercialise on this knowledge through our Solutions
business and are progressing our conversations with retailers across
the world on how we can enable and support the growth of their
online operations.
28
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CASE STUDY
DEVELOPING VOICE-ACTIVATED AI CAPABILITIES
FOR OUR CONSUMERS
Our technology teams are continuously pushing the boundaries
of software development in e-commerce by releasing the most
comprehensive and intuitive grocery shopping apps for iOS, watchOS
and Android.
In August 2017, we extended our offering to include a new platform
to our line-up and became the first global grocer to release a skill for
Alexa, the AI-based personal assistant from Amazon. Industry forecasts
indicate that by 2018, 30% of all web interactions will be through
conversational interfaces. This, alongside our own research, has shown
that many Ocado customers would benefit from voice-controlled
smart assistants for grocery shopping.
Among other things, the skill enables customers to add items to their
Ocado orders, check items within a basket, receive delivery updates,
find the price of the current basket and even ask what’s currently in
season. This equips customers with the ability to maintain casual
conversation with the assistant centred around their order based on
AI-based algorithms, which establish the most likely product for the
customer they are interacting with.
Innovations like these reflect our desire to constantly improve our retail
proposition through technology so that our customers get the greatest value
and convenience from their shopping experience. They also show the ways
in which we will further improve the customer experience in the future.
PRIMARY STRATEGIC ACTIONS
ENHANCE END-TO-END
TECHNOLOGY SOLUTIONS
Core to our business and competitive advantage is the proprietary
IP, knowledge and technology that supports our market-leading
proposition to customers and drives our operating efficiencies.
We strive to continuously innovate ahead of the market to ensure
we maintain our competitive edge. Throughout the year we have
continued to actively file and pursue patent applications to help
create a web of protection around our innovation and ensure we can
benefit from its value. The majority of our patent applications relate
to our physical infrastructure solution which is operational within our
newest CFC in Andover and what will be used in our partnerships with
Groupe Casino and Sobeys.
To enable us to innovate we ensure we invest in the right capabilities
and resources within our business. We have extensive and growing
technology and engineering teams, which by the end of the period
comprised over 1,100 employees. Our technology teams operate out
of multiple technology centres in the UK, Poland, Spain and Bulgaria,
taking advantage of the significant technological expertise found in
these regions.
ENABLE CURRENT AND FUTURE
PARTNERSʼ ONLINE BUSINESSES
As we continue to develop and innovate in our retail business we
embed any improvements into our platform for existing and future
partners.
Since launching their online business in January 2014 using our
broader platform offering, our first Solutions partner, Morrisons, has
seen strong growth at Morrisons.com. This year we have continued
to enable their development through the provision of our store
picking module, which allows them to service more of their customers
and in catchment areas beyond the reach of their current CFC
capacity. Morrisons launched the first live installations of the store
picking capabilities this year and are due to continue to roll this out
throughout the next year.
The validation of our Solutions business was further enhanced
through the signing of our first three international partnerships this
year. Groupe Casino, Sobeys and our regional European retail partner
will benefit from our technology, know-how and support services
required to create an efficient and intelligent online grocery business
and we look forward to helping them grow their operations.
Looking ahead, we are confident that we will be able to do further
deals with the momentum of new signings building over time.
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29
Strategic ReportStock Code: OCDO | www.ocadogroup.com KEY PERFORMANCE
Indicators
Why we use this measure
Measures growth at Group
level reflecting our Retail and
Solutions revenue.
2017 performance
12.7% v 2016
Strategic link
Why we use this measure
Measures revenue growth of our
Retail business.
2017 performance
12.4% v 2016
Strategic link
REVENUE (GROUP) (£m)
7
2
0
,
1
:
4
1
0
2
4
0
2
,
1
:
5
1
0
2
0
.
1
7
2
,
1
:
6
1
0
2
9
.
2
3
4
,
1
:
7
1
0
2
REVENUE (RETAIL) (£m) A
2
7
9
:
4
1
0
2
6
1
1
,
1
:
5
1
0
2
2
7
1
,
1
:
6
1
0
2
7
1
3
,
1
:
7
1
0
2
EBITDA (GROUP) (£m) A
2
7
:
4
1
0
2
2
8
:
5
1
0
2
4
8
:
6
1
0
2
4
8
:
7
1
0
2
EBITDA (RETAIL) (£m) A
0
0
0
,
0
0
0
:
4
1
0
2
0
0
0
,
0
0
0
:
5
1
0
2
8
.
5
7
:
6
1
0
2
2
.
9
7
:
7
1
0
2
REVENUE (SOLUTIONS)
(£m) A
Why we use this measure
Measures revenue growth of our
Solutions business.
EBITDA (SOLUTIONS) (£m) A
2017 performance
16.2% v 2016
Strategic link
Why we use this measure
Measures profitability at Group
level reflecting our retail and
solutions profit.
2017 performance
105.8% v 2016
Strategic link
0
0
0
:
4
1
0
2
0
0
0
:
5
1
0
2
4
.
9
9
:
6
1
0
2
5
.
5
1
1
:
7
1
0
2
PBT (GROUP) (£m)
2
.
7
:
4
1
0
2
9
.
1
1
:
5
1
0
2
1
.
2
1
:
6
1
0
2
)
5
.
0
(
:
7
1
0
2
All numbers on this page are reported on a 52 week basis
30
0
0
0
:
4
1
0
2
0
0
0
:
5
1
0
2
1
.
5
:
6
1
0
2
7
.
2
:
7
1
0
2
NET ASSETS (GROUP) (£m)
2
.
8
1
2
:
4
1
0
2
9
.
1
4
2
:
5
1
0
2
4
.
2
6
2
:
6
1
0
2
5
.
0
7
2
:
7
1
0
2
A
See Alternative Performance
Measures on page 196
25615
Proof 8
6 February 2018 1:07 AM
Why we use this measure
Measures operating profitability
at a Group level reflecting
both our Retail and Solutions
segments.
2017 performance
0% v 2016
Strategic link
Why we use this measure
Measures operating profitability
of our Retail business.
2017 performance
4.6% v 2016
Strategic link
Why we use this measure
Measures operating profitability
of our Solutions business.
2017 performance
(47.1)% v 2016
Strategic link
Why we use this measure
Measures the surplus between
total assets and total liabilities
at Group level.
2017 performance
3.1% v 2016
Strategic link
Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
Why we use this measure
Measures CFC operational
efficiency.
2017 performance
2.4% v 2016
Strategic link
Why we use this measure
Measures aggregate impact on
average shopping basket within
our Retail business.
2017 performance
(0.8)% v 2016
Strategic link
Why we use this measure
Measures efficiency of our
service delivery operation.
2017 performance
3.2% v 2016
Strategic link
CFC EFFICIENCY (UPH)
5
4
1
:
4
1
0
2
5
5
1
:
5
1
0
2
0
6
1
:
6
1
0
2
4
6
1
:
7
1
0
2
AVERAGE ORDER SIZE (£)
7
.
2
1
1
:
4
1
0
2
2
.
1
1
1
:
5
1
0
2
1
.
8
0
1
:
6
1
0
2
2
.
7
0
1
:
7
1
0
2
AVERAGE DELIVERIES
PER VAN PER WEEK
0
.
3
6
1
:
4
1
0
2
0
.
6
6
1
:
5
1
0
2
6
7
1
:
6
1
0
2
2
8
1
:
7
1
0
2
PRODUCT WASTE (%)
8
.
0
:
4
1
0
2
7
.
0
:
5
1
0
2
7
.
0
:
6
1
0
2
7
.
0
:
7
1
0
2
Why we use this measure
Measures efficiency of our operations
in terms of waste minimisation: the
lower the better.
2017 performance
0.0ppt v 2016
Strategic link
AVERAGE ORDERS PER WEEK Why we use this measure
Measures order growth in our
retail businesses.
2017 performance
14.3% v 2016
Strategic link
Why we use this measure
Measures growth in our core
customers who shopped in the
last 12 week.
2017 performance
11.2% v 2016
Strategic link
0
0
0
,
7
6
1
:
4
1
0
2
0
0
0
,
5
9
1
:
5
1
0
2
0
0
0
,
0
3
2
:
6
1
0
2
0
0
0
,
3
6
2
:
7
1
0
2
ACTIVE CUSTOMER BASE
0
0
0
,
3
5
4
:
4
1
0
2
0
0
0
,
9
0
5
:
5
1
0
2
0
0
0
,
0
8
5
:
6
1
0
2
0
0
0
,
5
4
6
:
7
1
0
2
SKU COUNT (HYPERMARKET) Why we use this measure
Measures growth in range
offered at Ocado.com, not
including standalone sites.
2017 performance
(2.0)% v 2016
Strategic link
NUMBER OF OCADO
SOLUTIONS PARTNERSHIPS
SIGNED
Why we use this measure
Measures partner growth within
our Solutions business.
2017 performance
200% v 2016
Strategic link
0
0
0
,
3
4
:
4
1
0
2
0
0
0
,
7
4
:
5
1
0
2
0
0
0
,
0
5
:
6
1
0
2
0
0
0
,
9
4
:
7
1
0
2
1
:
4
1
0
2
1
:
5
1
0
2
1
:
6
1
0
2
*
3
:
7
1
0
2
All numbers on this page are reported on a 52 week basis
* A fourth Ocado Solutions partner was signed in January 2018
25615
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31
Strategic ReportStock Code: OCDO | www.ocadogroup.com
CHIEF FINANCIAL OFFICER’S
Review
“For the period to
3 December 2017, we
maintained solid sales
growth in a competitive
environment while
progressing our business
further across many fronts.”
Duncan Tatton-Brown
CHIEF FINANCIAL OFFICER
REVENUE (£m)
9
.
8
4
9
:
4
1
0
2
6
.
7
0
1
,
1
:
5
1
0
2
0
.
1
7
2
,
1
:
6
1
0
2
EBITDA (£m)
6
.
1
7
:
4
1
0
2
5
.
1
8
:
5
1
0
2
3
.
4
8
:
6
1
0
2
9
.
2
3
4
,
1
:
7
1
0
2
k
e
e
w
2
5
3
.
4
8
:
7
1
0
2
k
e
e
w
2
5
8
.
3
6
4
,
1
:
7
1
0
2
k
e
e
w
3
5
0
.
6
8
:
7
1
0
2
k
e
e
w
3
5
For the period to 3 December 2017, we maintained
solid sales growth in a competitive environment while
progressing our business further across many fronts.
The Group secured two international partnership
deals and continued to deliver double digit revenue
growth despite a shortage of capacity limiting our UK
growth potential. Profit before tax for 2017 was £1.0
million (2016: £12.1 million). Profitability in the period
was adversely impacted by the wage increases partly
impacted by increased national living wage, higher
costs associated with the opening of Andover CFC,
our continued investment in a number of strategic
initiatives to aid future growth, and additional
depreciation.
The current period results comprise 53 weeks ended
3 December 2017. For comparability purposes 52 week
data, which excludes the final trading week of the 2017
financial year, is used (“2017”) for comparison to the
52 weeks ended 27 November 2016 (“2016”), unless
otherwise stated.
Revenue1
Gross profit
Other income
Distribution and administrative costs
Share of results from joint venture3
EBITDA A 2
Depreciation, amortisation and
impairment3
Net Finance costs
Exceptional items A
Profit/(Loss) before tax
FY 2017
(53 weeks)
£m
FY 2017
(52 weeks) A
£m
FY 2016
(52 weeks)
£m
Variance
(52 weeks)
1,463.8
504.3
61.0
480.9
1.6
86.0
71.0
13.7
0.3
1.0
1,432.9
494.3
59.5
471.3
1.6
84.3
71.0
13.5
0.3
(0.5)
1,271.0
435.3
52.9
406.0
2.1
84.3
60.3
9.5
2.4
12.1
12.7%
13.6%
12.5%
16.1%
(23.8%)
0.0%
17.7%
42.1%
87.5%
(104.1)%
1. Revenue is online sales (net of returns) including charges for delivery but excluding relevant vouchers/offers and value added
tax. The recharge of costs to Morrisons and fees charged to Morrisons and other solutions clients are also included in revenue.
2. EBITDA A is stated before the impact of exceptional items A .
3. Depreciation, amortisation and impairment and share of results from joint venture are based on a 53 weeks basis.
Depreciation, amortisation and impairment increased
by 17.7% to £71.0 million, driven primarily by the
annualised impact of the opening of the Andover CFC
and the associated software.
Net finance costs increased from £9.5 million to £13.5
million year-on-year. This was primarily driven by
the fees incurred on the successful issue of Senior
Secured Notes of £250 million during the year and a
renegotiated revolving credit facility (“RCF”).
Revenue grew by over 12.7% to £1,432.9 million in
comparison to 2016 revenue of £1,271.0 million. This
was driven by an increase in the average number of
orders a week and fees earned from our partnerships.
Gross profit increased by 13.6% year-on-year, a higher
rate than revenue primarily driven by faster growth in
Solutions revenue with currently higher gross profit
margins compared to Retail.
EBITDA A of £84.3 million was in line with the prior
year. This was maintained by cost savings achieved by
operational efficiencies in the CFCs and delivery, offset
by an increase in head office headcount and fixed costs.
TRADING REVIEW BY SEGMENT
Retail Performance
Revenue
Gross profit
Other income
Distribution and administrative costs A 1
EBITDA A 2
FY 2017
(53 weeks)
£m
FY 2017
(52 weeks) A
£m
FY 2016
(52 weeks)
£m
1,346.1
386.6
50.4
356.1
81.0
1,317.4
378.9
49.2
348.8
79.2
1,171.6
335.9
41.2
301.4
75.8
Variance
(52 weeks)
12.4%
12.8%
19.3%
15.7%
4.5%
A
See Alternative Performance
Measures on page 196
1. Distribution and administrative costs excludes depreciation, amortisation and impairment for the period.
2. EBITDA A does not include the impact of exceptional items A .
32
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
Retail revenue growth was driven by a 14.3% year-
on-year increase in orders per week to 263,000 (2016:
230,000). The average basket at Ocado.com of £107.22
decreased by (0.8)% compared to 2016. This was
primarily driven by an increased frequency of shop
from our loyal customers base, an increase in average
price per item offset by a strategic decision to reduce
multi buy promotional activity and a reduction in the
number of items per basket.
Gross Profit
Gross profit was up 12.8% to £378.9 million, compared
to 2016 gross profit of £335.9 million. The rate of
Distribution and Administrative Costs
growth, ahead of sales, was due to reduced unfunded
promotional activity and increases in selling price
offset by the increase in cost of goods.
Other Income
Other income increased by 19.3% to £49.2 million (2016:
£41.2 million) with supplier income increasing year-
on-year by 20.6% to £46.5 million (2016: £38.6 million)
equivalent to 3.5% of retail revenue (2016: 3.3%).
PROFIT/(LOSS) BEFORE TAX AND
EXCEPTIONAL ITEMS (£m)
3
.
1
:
7
1
0
2
s
k
e
e
W
3
5
)
2
.
0
(
:
7
1
0
2
s
k
e
e
W
2
5
5
.
7
:
4
1
0
2
9
.
1
1
:
5
1
0
2
5
.
4
1
:
6
1
0
2
CFC
Trunking and Delivery
Other operating costs
Marketing2
Head office costs
Total retail distribution and
administrative costs A 3
FY 2017
(53 weeks)
£m
FY 2017
(52 weeks) A
£m
FY 20161
(52 weeks)
£m
Variance
(52 weeks)
117.9
167.8
10.0
14.1
46.3
356.1
115.7
164.0
9.8
13.7
45.6
348.8
95.1
143.5
9.5
11.7
41.6
301.4
21.7%
14.3%
3.6%
17.1%
9.6%
15.7%
2016 include a re-categorisation of £0.9 million of cost from administrative expenses to distribution costs.
1.
2. Marketing expenditure excludes voucher costs.
3. Retail distribution and administrative costs excludes depreciation, amortisation and impairment.
Distribution and administrative costs consist of costs for
the fulfilment and delivery operations of the business
as well as head office costs. Total distribution and
administrative costs increased by 15.7% year-on-year.
CFC costs increased from £95.1 million to £115.7
million, an increase of 21.7% year-on-year. This was
primarily due to the annualised impact of the Andover
CFC which is not yet operating at full capacity and
is running at lower productivities as it scales its
operations. The remaining underlying increase was
principally due to a higher number of employees in
the CFC as a result of greater volumes and continuing
inflationary pressure in key cost lines.
Mature CFC UPH efficiencies continued to improve by
2.4% to 164 which partially offset the aforementioned
costs. This improvement in mature CFC UPH was driven
mainly by the Dordon CFC productivity, which regularly
exceeded 180 UPH in the period. UPH in the Hatfield
CFC also improved year-on-year.
Trunking and delivery costs increased by £20.5 million
to £164.0 million, an increase of 14.3% year-on-year
(2016: £143.5 million). This was due to increases in
wage-related and vehicle costs as a result of greater
order volumes and inflationary cost pressures.
Deliveries per van per week have risen by 3.2% to 182
(2016: 176) as customer density improved, Sunday
delivery slots increased, and we made continued
enhancements to our routing system.
Head office costs increased by 9.6% year-on-year from
£41.6 million to £45.6 million. This was driven by wage
inflation, from the growth in the general merchandise
business, and increased costs associated with our new
head offices.
Marketing costs excluding voucher spend increased from
£11.7 million to £13.7 million, 1.0% as a percentage of
retail revenue and in line with the prior period.
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33
Strategic ReportStock Code: OCDO | www.ocadogroup.com
CHIEF FINANCIAL OFFICER’S
Review
EBITDA A
EBITDA A excluding exceptional items for the retail business grew from £75.8 million in 2016 to £79.2 million.
Solutions Performance
Revenue
Distribution and administrative costs A
EBITDA A
FY 2017
(53 weeks)
£m
FY 2017
(52 weeks) A
£m
FY 2016
(52 weeks)
£m
117.7
115.1
2.5
115.5
112.7
2.7
99.4
93.9
5.5
Variance
(52 weeks)
16.2%
20.0%
(50.9)%
Revenue
The revenue from the Solutions business was £115.5 million, up from £99.4 million in 2016. This comprised of fees from our arrangement with Morrisons, for
services rendered, technology support, research and development, management fees, and a recharge of relevant operational variable and fixed costs and also for
the new Store Pick implementation. We also recognised an element of upfront fees relating to international partnerships that were signed in the period.
Distribution and Administrative Costs
Distribution Costs
Administrative costs
Total Solutions distribution and administrative costs A
FY 2017
(53 weeks)
£m
FY 2017
(52 weeks) A
£m
FY 2016
(52 weeks)
£m
88.6
26.5
115.1
86.9
25.8
112.7
76.7
17.2
93.9
Variance
(52 weeks)
13.3%
50.0%
20.0%
1. Solutions distribution and administrative costs excludes depreciation, amortisation and impairment.
Distribution and administrative costs predominantly consist of fulfilment and delivery operation costs for the Morrisons business and the costs of employees
developing solutions for, and supporting, our partnership agreements. These costs grew 20.0% year-on-year primarily as a result of an increase in headcount.
EBITDA A
EBITDA A from our Solutions activities was £2.7 million, a decrease of £(2.8) million.
Group Performance
Depreciation, amortisation and impairment
Net Finance costs
Share of results from joint venture
Profit/(Loss) before tax
FY 2017
(53 weeks)
£m
FY 2017
(52 weeks) A
£m
FY 2016
(52 weeks)
£m
71.0
13.7
1.6
1.0
71.0
13.5
1.6
(0.5)
60.3
9.5
2.1
12.1
Variance
(52 weeks)
17.9%
42.1%
(23.8)%
(104.1)%
Depreciation, Amortisation and Impairment
Total depreciation and amortisation costs were £71.0
million (2016: £60.3 million), an increase of 17.9%
year-on-year. The increase year-on-year in costs
was driven principally due to the commencement
of operations at Andover CFC and increased vehicle
numbers in line with business growth
Net Finance Costs
Net finance costs were £13.5 million, an increase
of 42.1% in comparison to the prior year (2016:
£9.5 million). The increase in finance costs are
due to the issuance of a £250 million in senior
secured notes during the period and renegotiated
revolving credit facility (“RCF”) of £100 million.
This resulted in an increase in finance costs and
£1.9 million of transaction fees in relation to the
RCF. This amount was offset by cost savings as
a result of debt expiring or being repaid with the
proceeds of the senior secured notes.
£4.4 million of interest costs have been capitalised
in the period in relation to the senior secured
notes and the RCF in accordance with the relevant
accounting standards (2016: £0.7 million).
Share of Result from Joint Venture
MHE JVCo Limited (“MHE JVCo”) holds Dordon
CFC assets, which Ocado uses to service its and
Morrisons’ online business and is owned jointly
by Ocado and Morrisons. The Group share of MHE
JVCo profit after tax in the period amounted to
£1.6 million (2016: £2.1 million).
Loss Before Tax
Loss before tax for the period was (£0.5) million
(2016: profit of £12.1 million).
Taxation
Due to the availability of capital allowances and
Group loss relief, the Group does not expect to
pay corporation tax during the period. No deferred
tax credit was recognised in the period. Ocado
had approximately £183.6 million (2016: £268.6
million) of unutilised carried forward tax losses
at the end of the period.
Dividend
During the period, the Group did not declare
a dividend.
Earnings Per Share
Basic earnings per share were 0.16p (2016: 2.02p)
and diluted earnings per share were 0.16p
(2016: 1.96p).
34
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Capital Expenditure
Capital expenditure for the period:
CAPITAL EXPENDITURE
Mature CFCs
New CFCs
Delivery
Technology
Fulfilment Development
Other
Total capital expenditure1, 2 (excluding share of MHE JVCo)
Total capital expenditure3 (including share of MHE JVCo)
FY 2017
(53 weeks)
£m
FY 2016
(52 weeks)
£m
3.1
69.7
16.5
42.8
15.5
10.6
158.2
160.3
3.4
64.6
20.6
34.3
19.7
10.5
153.1
156.9
Mature CFCs
New CFCs
Delivery
Technology
Fulfilment development
Other
5
1
0
2
6
1
0
2
7
1
0
2
1. Capital expenditure includes tangible and intangible assets.
2. Capital expenditure excludes assets leased from MHE JVCo under finance lease arrangements.
3. Capital expenditure includes Ocado share of the MHE JVCo capex in 2017 of £2.1 million and in 2016 of £3.9 million.
Capital expenditure in the Hatfield CFC was £3.1 million
which mainly related to a number of small projects to
improve the capacity and resiliency of these sites.
We incurred £69.7 million of costs in the period for our
new CFCs. The Andover CFC commenced operations
at the end of 2016 and has steadily increased volumes
during 2017, with a potential eventual capacity above
65,000 OPW. The fit out of the next CFC located in Erith,
South East London continued according to plan and
this site is expected to open in 2018 with a potential
eventual capacity over 200,000 OPW.
Total expenditure on new vehicles in the period was
£19. million (2016: £16.5 million). This expenditure
enabled business growth and replacement of vehicles
that have reached or exceeded their five year useful life.
Ocado continued to develop its own proprietary
software and incurred £35.7 million (2016: £26.8
million) of internal development costs in the period
on technology, with a further £7.1 million (2016: £7.5
million) spent on computer hardware and software.
We expanded our technology total headcount to nearly
1,100 staff at the end of the period (2016: over 950 staff)
as increased investments were made to support our
strategic initiatives. The main areas of investment were
replatforming of our technology and the greater use of
public and private cloud services, improvements in the
efficiency of our routing systems, enhancements to our
customer proposition, developing a store pick solution
for implementation by our solutions partners and
support for the growth of the Andover CFC.
Fulfilment development expenditure of £15.5 million
was spent in developing our next generation fulfilment
solutions which will be used in our latest CFCs and our
relevant Solutions partners.
In the period, we incurred our share of the capital
expenditure relating to MHE JVCo of £2.1 million
(2016: £3.9 million) to improve operational capacity
and efficiency of the Dordon CFC and various minor
improvement projects.
Other capital expenditure of £10.6 million was incurred
in the period, of which £6.4 million related to our
general merchandise business. This was to support
growth in capacity of our existing general merchandise
distribution centre and to fund development costs for
our second general merchandise distribution centre
opening in 2018.
At 3 December 2017, capital commitments contracted,
but not provided for by the Group, amounted to
£45.0 million (2016: £34.4 million). We expect capital
expenditure in 2018 to be approximately £210 million
which mainly comprises the continuing investment
in our infrastructure and technology solutions, roll
out of our new CFCs and additional investment in
new vehicles to support business growth and the
replacement of vehicles coming to the end of their
five year financing contracts. This includes capex
requirements related directly to our new Solutions’
customers.
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35
Strategic ReportStock Code: OCDO | www.ocadogroup.com
CHIEF FINANCIAL OFFICER’S
Review
“Operating cash
flow increased
by £9.9 million
during the
year driven by
an increase in
working capital
and EBITDA*,
offset by an
increase in
finance costs.”
Cash Flow
Net operating cash flow after finance costs increased to £106.8 million, up 10.2% from £96.9 million in 2016 as
detailed below:
FY 2017
(53 weeks)
£m
FY 2016
(52 weeks) A
£m
86.0
30.6
(0.3)
4.6
(14.1)
106.8
(169.4)
7.6
152.4
1.5
0.2
99.1
84.3
18.5
(1.7)
4.9
(9.1)
96.9
(123.9)
8.4
22.2
1.1
0.4
5.1
Trade and Other Receivables includes £12.2 million
(2016: £5.9 million) of amounts due from suppliers in
respect of commercial income. £1.0 million (2016: £5.9
million) is within trade receivables, and £8.6 million
(2016: £10.8 million) within accrued income.
Included within property, plant and equipment is
capital work-in-progress for land and buildings of
£37.2 million (2016: £27.4 million) and capital work-in-
progress for fixtures, fittings, plant and machinery of
£61.6 million (2016: £22.9 million), the increase relating
to the Erith CFC and the second non-food distribution
site under development.
Increasing Financing Flexibility
In the period we announced the successful placing
of £250 million Senior Secured Notes due 2024 at a
coupon of 4%, as well as an amendment and extension
to our current RCF which was reduced to £100 million,
from £210 million and extended to June 2022. This
refinancing will be used for the continued growth of
our UK retail business and further development of our
platform.
EBITDA A 1
Working capital movement
Exceptional items A
Other non-cash items
Finance costs paid
Operating cash flow
Capital investment
Dividend from joint venture
Increase in net debt A /finance obligations
Proceeds from share issues
Other investing and financing activities
Movement in cash and cash equivalents
1. EBITDA A is stated before the impact of exceptional items A .
Operating cash flow increased by £9.9 million during
the year driven by an increase in working capital and
EBITDA A , offset by an increase in finance costs. The
increase in working capital inflow of £12.1 million is
driven by an increase in trade and other payables of
£19.4 million and in inventories of £5.4 million, offset
by a decrease in trade and other receivables of £12.7
million.
During the period there was £169.4 million of capital
expenditure as the Group continues to invest for
future growth comprising investments in new CFCs,
development of our next generation fulfilment
solutions, and spend on new vehicles and spoke sites.
Net financing cash flows in the period were £153.9
million comprising £152.4 million of new net debt A
and financing obligations and £1.5 million of proceeds
from the issue of new share capital following the
exercise of employee share options.
Balance Sheet
The Group had cash and cash equivalents of £150.0
million at the end of the financial year versus £50.9
million as at 27 November 2016.
Gross debt at the period end was £378.0 million (2016:
£215.8 million) and external gross debt A , excluding
obligations under finance leases owing to MHE JVCo,
was £283.9 million (2016: £107.1 million). The increase
in net external debt is due to the level of investment in
improving our platform and adding UK capacity being
ahead of our current cash generation. Net external
debt at the period end was £133.9 million (2016: £56.2
million). The increase of £77.7 million was mainly
driven by the capital investment activities.
36
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Key Performance Indicators
The following table sets out a summary of selected unaudited operating information for FY 2017 and FY 2016:
Average orders per week
Average order size (£)1
Overall CFC efficiency (units per hour)2
Average deliveries per van per week (DPV/week)
Average product wastage (% of retail revenue)3
FY 2017
(53 weeks)
FY 2017
(52 weeks) A
FY 2016
(52 weeks)
Variance
(52 weeks)
264,000
107.28
164
182
0.7%
263,000
107.22
164
182
0.7%
230,000
108.13
160
176
0.7%
14.3%
(0.8)%
2.4%
3.2%
—
Source: the information in the table above is derived from information extracted from internal financial and operating reporting systems and is unaudited
1. Average retail value of goods a customer receives (including VAT and delivery charge) per order from Ocado.com.
2. Measured as units dispatched from the CFC per variable hour worked by Hatfield CFC and Dordon CFC operational personnel. We consider a CFC to be mature if it had been open 12
months by the start of the half year reporting period.
Value of products purged for having passed Ocado’s “use by” life guarantee divided by retail revenue.
3.
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37
Strategic ReportStock Code: OCDO | www.ocadogroup.com HOW WE MANAGE
Our Risks
THE RISK MANAGEMENT FRAMEWORK
Ocado’s risk management process is designed to improve the
likelihood of delivering our business objectives, protect the interests of
our key stakeholders, enhance the quality of our decision making, and
assist in the safeguarding of our assets, including people, finances,
property and reputation.
The Board is responsible for the identification of Ocado’s key strategic
and emerging risks, and for the review and approval of the risk
management framework. The Audit Committee, delegated by the
Board, is responsible for the independent review of the effectiveness
of risk management, the system of internal control, and the
monitoring of the quality of financial statements and consideration
of any findings reported by the auditors, Deloitte LLP, in relation to
Ocado’s control environment and its financial reporting procedures.
The key features of our system of internal control and risk
management, including those relating to the financial reporting
process, are:
• an organisational structure with clear segregation of duties, control
and authority, and a framework of policies covering all key areas;
• a system of financial reporting, business planning and forecasting
processes;
• a capital approval policy that controls Ocado’s capital expenditure
and a post-completion review process for significant projects;
• monitoring the progress of major projects by management, the
Executive Directors and the Board;
• a Risk Committee which monitors Ocado’s risk control processes;
• an Information Security Committee which monitors Ocado’s
information security;
• an Internal Audit function that provides independent assurance on
key programmes and controls;
• a treasury policy overseen by a
Treasury Committee that manages
Ocado’s cash and deposits,
investments, foreign exchange
and interest rates, so as to ensure
liquidity and minimise financial risk;
• a food and product technology
department, responsible for
designing and monitoring
compliance with Ocado’s processes
for the procurement and handling
of foods and other goods for resale;
and
• other control measures outlined
elsewhere in this Annual Report
including legal and regulatory
compliance and health and safety.
KEY DEVELOPMENTS IN 2017
The process described on this page for
identifying, evaluating and managing
the principal risks faced by the Group
operated during the period and up to
the date of this Annual Report. Such a
system can only provide reasonable,
and not absolute, assurance, as it
is designed to manage rather than
eliminate the risk of failure to achieve
business objectives.
During 2017, Ocado continued
to enhance its approach to risk
management. This included an
externally facilitated review of the
Group’s information security controls,
the development of a programme to
help meet the requirements of the new
General Data Protection Regulation,
and an independent review of Internal
Audit. At the end of the period, the
Group established a new independent
function called Governance, Risk and
Compliance. The new function has
assumed responsibility for supporting
the Group’s risk management processes,
such responsibility having been
performed previously by Internal Audit
(previously called Internal Audit & Risk)
and to help enhance the Group’s risk
management framework.
The Audit Committee, on behalf of the
Board, undertook an annual review of
the effectiveness of risk management
and the system of internal control,
covering all significant controls
including financial, operational,
compliance controls, and risk
management systems.
For further information on the review of
financial reporting, refer to page 65 of
the Audit Committee report.
2018 PLAN AND BEYOND
The new Governance, Risk and
Compliance function will carry on
existing risk management arrangements
previously carried out by Internal Audit
and will work closely with Internal Audit
1.
SET
STRATEGY
4.
REVIEW
RISKS
RISK
MANAGEMENT
2.
EVALUATE
RISKS
3.
IMPLEMENT
MITIGATION
38
1. Our strategy informs the setting of objectives across the
business and is widely communicated.
2. Executive Directors evaluate the most significant strategic
risks for the Group. In addition, each divisional Director
prepares a risk register for their respective division,
highlighting their significant risks. The Risk Committee
oversees risk control processes and risk analysis from each
part of the business, and reviews these top down and bottom
up representations to ensure that no significant risks have
been omitted.
3. Divisional directors identify how they will manage or mitigate
their significant risks. These actions are then summarised into a
description of the Group-wide mitigation process for each risk.
4. Group-wide risks and mitigation processes are regularly
reviewed by the Risk Committee and by the Audit Committee.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 to help provide assurance services to the Group intended to support
the operations of the business. As well as supporting the Group’s risk
management processes in 2018, Governance, Risk and Compliance
will help develop the Group’s new information security strategy and
work roadmap, and implement a new reporting system to support
risk registers for the Group and for reporting of information security
arrangements to Ocado Solutions clients. The function will continue
to input into key strategic decisions regarding major projects and
new Ocado Solutions clients and help monitor implementation of
key projects.
ASSESSMENT OF THE GROUP’S PROSPECTS
The Directors have assessed the Group’s prospects, both as a going
concern and its viability longer term. This assessment informs the
following distinct statements:
1. The Directors considered it appropriate to adopt the going concern
basis of accounting in the preparation of the Company’s and the
Group’s financial statements.
2. The Directors have a reasonable expectation that the Company
and the Group will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment.
Both assessments are closely linked to the Directors’ assessment
of the principal risks facing the Group (including those that would
threaten its business model, future performance, solvency or liquidity),
which is outlined on pages 40 and 41.
GOING CONCERN STATEMENT
Accounting standards require that the directors satisfy themselves that it
is reasonable for them to conclude whether it is appropriate to prepare
financial statements on a going concern basis. There has been no material
uncertainty identified which would cast significant doubt upon the
Group’s ability to continue using the going concern basis of accounting for
the 12 months following the approval of this Annual Report.
In assessing going concern, the Directors take into account the Group’s
cash flows, solvency and liquidity positions and borrowing facilities.
At period end, the Group had cash and cash equivalents of £150.0
million (2016: £50.9 million), external gross debt A (excluding finance
leases payable to MHE JVCo of £283.9 million (2016: £107.1 million))
and net current assets of £2.9 million (2016: £141.2 million net current
liabilities). The Group has a mix of short and medium term finance
arrangements and has £250 million senior secured notes due 2024
and a £100 million revolving credit facility which contains typical
financial covenants and runs until June 2022. The Group forecasts its
liquidity requirements, working capital position and the maintenance
of sufficient headroom against the financial covenants in its borrowing
facilities (see below). The forecasts involve the Directors making
judgements about future revenue, EBITDA A and capital expenditure
and the cost of future financing. The financial position of the Group,
including information on cash flow, can be found in Our Financials
on pages 120 to 191. In determining whether there are material
uncertainties, the Directors consider the Group’s business activities,
together with factors that are likely to affect its future development
and position (see pages 02 and 37), the Group’s principal risks and the
likely effectiveness of any mitigating actions and controls available to
the Directors (see pages 40 and 41).
A
See Alternative Performance
Measures on page 196
VIABILITY STATEMENT
In addition to the going concern
assessment, the Directors have
considered the viability of the business.
The Code requires that the Directors
assess the prospects of the Group
over an appropriate period of time
selected by them. The Directors have
considered whether the Group will be
able to continue in operation and meet
its liabilities as they fall due over the
three year period from approval of this
Annual Report. Although the Group’s
strategic plan forecasts beyond three
years, the Directors took into account
the impact on forecast outcomes of
the rapid growth of the business and
its changing strategic opportunities,
(among other factors) in concluding
that three years was the most
appropriate period for assessing the
Group’s prospects.
The Directors rely on a number of
existing processes to justify their viability
assessment. The annual budget, which
provides a greater level of certainty of
outcome than the longer-term plans,
is used to set targets for the Group for
the upcoming financial year and is used
by the Remuneration Committee to
set performance targets for the Annual
Incentive Plan. A longer term business
model, which is refreshed by the Board
at least annually, provides less certainty
of outcome, but provides a sensible
planning tool against which strategic
decisions can be made. This plan
contemplates the impact of a number of
different strategic initiatives, including
Ocado Solutions transactions, possible
trials of and the pace of investment
in new technology, new CFCs (which
typically take up to three years for
planning and construction), potential
increases in CFC capacity and changes
in the rate of retail customer growth.
The plans make assumptions about the
business including projected capital
expenditure, financing requirements,
available finance and compliance with
any financial covenants.
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To assist the Directors’ assessment,
the financial projections in the longer
term business model were subject to
severe but plausible stress tests whereby
certain key assumptions were adjusted
downwards, notably a material decline
in the rate of revenue growth, lower gross
margins, an increase in operating costs,
a reduction in fees from Ocado Solutions
clients for lower service levels or delayed
implementation, and some combinations
thereof. The tests were intended to
show various outcomes including the
impact on the Group’s net debt A and
cash flow over the three years and an
assessment of the impact on the financial
covenants in the revolving credit facility,
all of which are relevant to assessing the
solvency and liquidity of the Group in this
context. A decline in revenue growth or
margins, an increase in operating costs
or reduction in Ocado Solutions fees
can result from a range of principal risks
in the business including failure by the
Group to maintain a competitive pricing
position, a decline in customer service
levels and a delay in implementing
capacity or a CFC for the retail business
or a Ocado Solutions customer. The
Directors consider that it is reasonable
to believe that the Group’s £100 million
revolving credit facility, which runs until
mid 2022, and senior secured notes due
2024, will be refinanced or extended, or
that other financing will be available, to
provide continuing finance to the Group.
The Directors’ assessment also took into
account the other principal risks and
mitigating actions set out on pages 40
and 41.
The above considerations form the basis
of the Board’s reasonable expectations
that the Group will be able to continue in
operation and meet its liabilities as they
fall due over the three year period from
approval of this Annual Report.
The Board carried out its assessment of
principal risks and uncertainties during
the period. Set out overleaf are details
of the principal risks and uncertainties
for the Group and the key mitigating
activities used to address them. The
risks have been listed against the most
relevant Group strategic objectives,
together with the operational risks, and
are not set out in any order of priority or
importance.
39
Strategic ReportStock Code: OCDO | www.ocadogroup.com HOW WE MANAGE
Our Risks
Strategic Objective
Risks
Mitigation Action/Control
Change During the Year
Risk of decline in high service levels
Driving Growth
Failure to develop retail proposition to
appeal to broader customer base and
sustain growth rates¹
Failure to develop sufficient
management and technology
capability or bandwidth to deliver on
all our strategic priorities
Risk of not signing multiple Ocado
Solutions deals in the medium
term and not being able to execute
effectively²
Risk of negative implications caused
by final Brexit terms such as increase
in import costs or difficulty in hiring
employees
A risk of delays in the implementation
of new capacity for both Ocado and
Morrisons
Maximising Efficiency
KEY:
• Weekly monitoring of the key indicators and the
underlying drivers against published targets
• A number of planned initiatives are intended to
improve operational performance
• Continuation of LPP basket matching price
comparison and competitive pricing
• Growth of the Ocado own-label range alongside
continued provision of the Waitrose range
• Growth of branded ranges and expansion of
supplier base
• Alternative sourcing scenarios considered in the
event that the Waitrose sourcing relationship is not
renewed when it expires in 2020
• Continuation of investment and optimisation of the
marketing channels to acquire new customers
• Continued improvement of webshop and apps
Increasing hiring of technology staff, including
•
senior positions
• Regular review of IT prioritisation process
• Review of technology structures and processes to
•
•
•
position the Group for delivering a larger number of
complex projects
Increased hiring of managers and subject matter
experts in retail, operational and central support areas
Investment in our platform which enables Ocado
Solutions is also required for Ocado’s expanding
Retail business. Initial deployment is in Andover and
Erith CFCs
Impact of not signing multiple Ocado Solutions
deals in the medium term is restricted to the lost
opportunity to increase our earnings from our
Solutions business
• The amount of capital invested in our platform is
carefully controlled and we have the ability to reduce
costs by scaling back the speed of the development
• Resources and capabilities will be scaled and reallocated
to help meet Ocado Solutions project deadlines. See
above risk
• Regular monitoring of government reporting on
Brexit negotiations to understand impact on the
business including our ability to hire employees from
the EU, an assessment of trade tariffs on imported
goods and impact of disharmonisation of UK and EU
regulatory standards in a range of areas
• Collaborating with trade organisations to follow
developments and express our concerns to government
• Dedicating resources to the modularisation of
technology and logistics systems to enable faster
replication
• New capacity in development at Andover CFC and
Erith CFC
• Regular Executive Board steering and full Board
reporting of new technology projects
A number of Ocado
Solutions deals have been
signed, leading to the
challenge of implementing
multiple international
projects
Risk has increased
Risk has decreased
No change
Not applicable
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Risks
Mitigation Action/Control
Change During the Year
Utilising Proprietary
Knowledge
Technological innovation
supersedes our own and offers
improved methods of food
distribution to consumers
Protecting our IP
Infringing a third party’s IP
A risk of a food safety or product safety
incident
A risk of changes in regulations
impacting our retail business model or
the viability of Ocado Solutions deals
Operational
• Engagement with a wide number of international
grocers to understand market needs
• Experienced teams in place who understand
the current solutions and are aware of global
alternatives used in other industries
• Benefit to our UK business from examining the retail
businesses of international grocers
• Ongoing effort to identify patentable inventions and
to apply for patents, with an increased number of
patent applications
• Ongoing review of our patent portfolio and
discussion of other IP issues by the Ocado
Innovation Committee
• Where necessary we take steps to protect our IP from
unauthorised use
• Conducting “freedom to operate” searches on
selected technologies in selected jurisdictions
• Where appropriate, obtaining specialist or legal
advice including to help ensure our ability to use our
IP is not restricted by infringement claims
• Experienced legal, food and product technology
professionals monitor compliance against policies
and procedures
• Supplier approval and certification process
Food and product safety policies and quality
•
management with appropriate operational procedures
• Regular monitoring of regulatory developments to
ensure that changes are identified
• Monitoring operational performance to minimise
environmental impact
• Some due diligence carried out at appropriate
Risk of major cyber-attack or data loss
•
stages in the Ocado Solutions process
IT systems are structured to operate reliably and
securely
Business interruption
• The security of our IT systems is regularly tested by
third parties; security monitoring capabilities have
been expanded
• No customer payment card data is held in Ocado’s
databases
• Access to customer personal data is restricted to
those who need this information as part of their job
• GDPR compliance programme is being carried out
IT systems are structured to operate reliably and
•
securely
• Dedicated engineering teams on site with daily
maintenance programmes to support the continued
operation of equipment
• Disaster recovery testing and business continuity
plans continue to be progressed and updated
• High level of protection for CFCs and equipment,
combined with business interruption insurance to
transfer residual risks
1. The risk described in the 2016 annual report as a “Failure to maintain competitive pricing position” has been deleted and included as a sub-set of the risk concerning “Failure to
develop retail proposition to appeal to broader customer base and sustain growth rates”.
2. The risk described in the 2016 Annual Report as “Risk of not signing multiple Ocado Solutions deals in the medium term” has been expanded to include the risk of not being able to
execute the deals effectively.
For further information on the financial risks, see pages 161 to 163 of the notes to the financial statements.
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41
Strategic ReportStock Code: OCDO | www.ocadogroup.com CORPORATE
Responsibility
2017 was a landmark year for our 2020
Corporate Responsibility Strategy: The
Ocado Way. We won the Best First Time
Responder Award for our voluntary
submission to The Carbon Disclosure
Project; we made progress with all four
pillars of our Corporate Responsibility
strategy, and we completed our first
Corporate Responsibility report.
Highlights for each pillar are featured
below. For a more detailed look, view
the full report at ocadogroup.com.
THE OCADO WAY: 2020 STRATEGY
EDUCATION ENTREPRENEURSHIP ENVIRONMENT EATING WELL
EDUCATION
By sharing our expertise in food, retail, logistics and technology, we aim to add value
to our society now, and help the next generation achieve more. In 2017, we continued
to promote digital literacy, road safety, and recycling. Building on our existing
relationship with HMP Northumberland recycling Ocado uniforms, we supported an
education project to upskill offenders and enable them to earn a formal qualification.
Code for Life
We continued to develop Rapid Router, our open source software and guidance
resource, teaching Key Stage 1 and 2 children how to code. At the end of November
2017, there were over 113,300 registered users and 2,267 registered schools
worldwide.
Road Safety
We continued to work with Hertfordshire County Council on road safety projects
aimed at children across five local primary schools. In September, we started working
with Warwickshire County Council, the location of our Dordon CFC, on similar
projects.
In spring 2017, we sponsored a special edition of The Young Driver’s Guide, a
magazine which helps reduce road risks for new drivers. 27,000 copies were delivered
to 125 schools in Warwickshire and Hertfordshire, counties where we have a high
presence on the roads. 88% of readers said they were more aware of the dangers
faced by new drivers after reading the magazine.
Recycling
2017 is the second of our five year partnership with WRAP, promoting recycling
education projects to primary school children. This year, we invested £100,000 in
the partnership, along with an additional £30,000 to support Recycle Week, a social
media campaign promoting the benefits of recycling, with a reach of over 3.5 million.
HMP Northumberland
HMP Northumberland textiles factory has processed over 55 tonnes of Ocado
uniforms since our working partnership began in 2015. In 2017, prisoners began to
include our refashioning project as part of the Performing Manufacturing Operations
qualification (PMO), which is a Level 2 NVQ. In 2017, 17 offenders successfully
completed the PMO, with a further 61 prisoners enrolled in the course, increasing
offender employment opportunities after release. 10 product designs have been
developed by offenders, which will be available for sale in 2018, with proceeds going
to the Ocado Foundation for future charitable donations.
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ENTREPRENEURSHIP
ENVIRONMENT
We provide an environment where entrepreneurs
in retail and technology can flourish. In 2017 we
continued to find opportunities to encourage
and reward entrepreneurial thinking in our own
business and in education.
Supporting SMEs
As discussed in last year’s report, at the end
of 2016 we launched our supplier application
website, Supply Ocado, to make our retail listing
process more accessible for Small to Medium-
sized Enterprises (SMEs). In 2017 1,003 businesses
applied through the website, 151 entrepreneurs
met our Buyers, and 33 brands launched on
ocado.com.
We also established the Ocado Primary Network,
a team dedicated to improving logistics for small
suppliers at launch, and to continue this as they
grow. 150 SMEs are currently managed by a
dedicated full-time Ocado team.
We relaunched Britain’s Next Top Supplier, our
competition awarding a small supplier a £20,000
launch package and a six month listing with us at
ocado.com. The 2017 winner, The Garlic Farm,
launched on our webshop with a range of 47
products within 6 weeks.
“To win Britain’s Next Top Supplier
2017 is an incredible accolade for
us. We’ve been innovating with
garlic for over 50 years and we are
so excited to bring the results of our
labour to Ocado customers. We are
after all a nation of garlic lovers –
and our unusual products will bring
that familiar taste to people in
ways they have never experienced
before.”
Natasha Edwards
OPERATIONS MANAGER AT THE
GARLIC FARM
Engineering Education Scheme
In September, we signed up to this scheme,
partnering with Monk’s Walk School in Welwyn
Garden City, Hertfordshire. Our Logistics
Development and Engineering team agreed to
mentor six A Level students, providing them with
a special Ocado challenge to solve. We’ll report
more on the results next year.
Waste
Our food waste figures are now available for the
first time in our first Corporate Responsibility
report. View the report in full online at
ocadogroup.com. We have focused on food waste
reporting first; figures for our operational waste are
almost complete, and we hope to publish these
imminently.
We continue to measure food waste and find
alternative solutions to anaerobic digestion or
landfill for edible food. This year, relationships with
our Food Partners (food banks and food charities
across the UK) have strengthened; we have
continued to work with food surplus redistributors,
such as Company Shop, and our staff restaurants.
We donated and redistributed 2,200 tonnes of food
in the last 12 months.
Our uniform recycling project with HMP
Northumberland (described earlier) continues to
grow, and has now prevented 55 tonnes of old
Ocado uniforms from being sent to landfill sites.
We continue to work on environmental data
management with Ecometrica to provide a
centralised data management system. Carbon
emissions from our CFCs, Spokes and vehicles
are tracked. We are expanding this to track all
operational waste.
Greenhouse Gas Emissions
Due to our continued growth, this reporting period
saw our absolute emissions increase by 9.4%
compared to the previous financial year. Despite
this, we have decreased our intensity measure in
tonnes of CO2e per hundred thousand orders by
27.6% against our 2013 base year.
As in previous years, fuels used by our fleet remain
the largest contributor to our carbon footprint,
accounting for 66% of our total emissions.
Electricity is the second highest contributor,
making up 25.5% of emissions, attributed mostly
to our main CFCs. This is the first year we have
reported a market-based figure alongside the
traditional location-based method.
In June this year, we voluntarily submitted data to
be reviewed by the Carbon Disclosure Project and
subsequently won their Climate Change Best First
Time Responder award. We’re extremely proud
to have an independent body confirm that we’re
working as efficiently as possible, and we will
continue to strive for transparency and excellence.
This year the Carbon Trust have carried out a limited
assurance engagement on selected GHG emissions
data (below) in accordance with ISO14064:3
Specification with guidance for the verification of
greenhouse gas assertions. A copy of the limited
assurance report is available at ocadogroup.com.
GHG Emissions (tonnes CO2e)
Scope 1 – Direct
Scope 2 – Indirect
Location-based
Market-based
Total Emissions (location-based)
2016/17
82,305
28,270
14,510
110,575
2015/16
72,377
28,675
—
101,052
2012/13
39,530
21,613
—
61,143
Intensity measure (tonnes CO2e/100,000 orders)
Location-based
Market-based
596.4
522.2
582.8
—
823.4
—
Due to inaccuracies discovered in our 2015/16 data we have restated our GHG emissions and intensity measure for that
period. Total emissions and intensity measure for 2017 have been calculated using the location-based method.
View more information about the basis of preparation of
our emissions data online at ocadogroup.com
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CORPORATE
Responsibility
EATING WELL
As an online grocer, we have a natural connection with food. We’ve continued to focus on reducing food poverty in
the UK, growing our Food Partnerships with food banks and food charities. We’ve also maintained our promise to
encourage our customers to eat well by having at least 100 promotions on fresh fruit and vegetables at all times.
FRESH FRUIT AND VEGETABLES ON PROMOTION 2017
500
400
300
200
100
0
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Donate Food with Ocado
For every £1 our customers give in Donate Food With Ocado vouchers, we give £2 worth of food to our food bank
partners. Rather than food banks being overloaded with overstocks, they choose what they need most from a long
list of fresh and ambient products. In 2017 £142,709 was donated by Ocado customers; to date we have matched
customer donations and given local charities 64 tonnes of food.
Cool vans
When collecting fresh donations, we ask our Food Partners to use refrigerated transport. This year, we’ve given three
of our charity partners a refrigerated van and we’ve paid for the branding, leasing, maintenance, tax and insurance
on their behalf; they simply pay for their fuel. Their van drivers have also completed our Safe and Efficient Driver
training programme, to try and keep them safe on the road.
Ocado is committed to the upholding of human rights. During the period, we introduced a Human Rights
Policy reflecting our commitment to acting ethically and with integrity in all our business relationships and to
implementing effective systems and controls. We fully support the Modern Slavery Act which is designed to root
out slavery-like practices, such as human trafficking, in global supply chains. Our modern slavery statement will be
published at ocadogroup.com.
During the period we made a donation of £306,808 to the Prince of Wales’s Charitable Foundation, through sales of
Duchy branded products.
No donations were made by the Group to any political party, organisation or candidate during the period (2016: nil).
THE OCADO FOUNDATION
The Ocado Foundation launched in April 2015; it’s the home of our charitable and fundraising activity, both internally and
externally. We help our employees across the UK make a difference at a local level. We do this through donations to multiple
small, local projects and charities where impact will be greatest, rather than only supporting a single national charity.
Matching the fundraising and volunteering activity resulted in donations of just over £22,147 for charities across the
UK through the Ocado Foundation in the last 12 months. Ocado employees have volunteered more than 2,000 hours
to a variety of good causes.
Carrier bags
The legislation that came into effect
in October 2015 requires a 5p charge
on all new single use carrier bags in
England. Given the aim of the legislation
is to reduce bag littering and damage
to wildlife, we believe that this is best
done by removing the bags from
circulation. One of the unintended risks
of the legislation for us is that it could
encourage our customers to keep hold
of carrier bags rather than return them to
us for recycling, so we decided to build
on our existing (and very successful)
bag recycling programme by offering
a financial incentive for customers to
return used bags to us. We call this our
Bag Buy Back Scheme. A large majority
of the proceeds from the bag charge fund
this scheme; we believe that using a Bag
Buy Back Scheme to proactively retrieve
and recycle used bags from a customer’s
home correlates closely with the aim of
the legislation, and is environmentally
more sensible than simply donating all
the proceeds to a charity. The Ocado
Foundation is the custodian of the
remaining funds and disburses them on
charitable environmental, waste, and
recycling projects. During the 2016/17
period, we charged customers for
138.8 million bags.
We’ve used the remainder of the funds
from the charge to support waste,
litter and recycling charities across
the UK. This further supports the
desire of the Single Use Carrier Bag
Charging Legislation to see some of
the money raised go to environmental
causes such as supporting work to
help tackle littering. This year we’ve
donated £130,000 of carrier bag funds to
WRAP, supporting recycling education
projects; £150,000 has been spent
on five refrigerated vans for our Food
Partners; and £65,000 has been donated
to CleanupUK, a charity which helps
people combat litter in their local area.
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CASE STUDY
EDIBLELINKS FOOD BANK, ATHERSTONE
This food partner to CFC Dordon started out as a simple food bank in
2013, redistributing food surplus to local people experiencing food crisis.
The project has grown into one of our most successful partnerships,
attracting media coverage with their inventive community group
membership schemes and pilot projects with government services.
“In just 13 weeks, we identified and refurbished empty council units and
found a charity partner to set up our food bank, which opened in April 2013.
We were collecting 40 to 60 totes in a council van, weekly. Now we’re using
our donated Ocado Foundation vans to collect ambient and perishable
food every weekday, and we’ve received a total of 33 tonnes of food.
When we started, we issued around 50 food vouchers to residents in need
every month; we now issue at least this amount every week. In addition, we’re
using excess donations to support 135 community groups, 15 breakfast clubs in
secondary schools, and are working towards sustainability with initiatives like
our honesty shops. Without doubt, this is the best project that I have ever been
involved with and shows what is possible by the public and third sector working
with a brilliant private sector partner. Ocado’s support has meant that we reach
thousands of people in our local and surrounding communities, making a real
difference to people’s finances, health and wellbeing.”
Bob Trahern Assistant Chief Executive at North Warwickshire County
Council
CASE STUDY
CLEANUPUK, BEAUTIFUL BOROUGHS PROJECT
This charity helps people combat litter in their local area. We got in
touch in September 2016, after we heard about their Beautiful Boroughs
project, which focused on deprived areas in 10 boroughs in east and
north London. We donated money from the single use carrier bag charge
to help them reach their funding target. The money we’ve donated has
enabled them to launch 40 additional litter picking groups, and extend
the Beautiful Boroughs project to include Islington.
“Ocado’s generous financial support has enabled CleanupUK to continue
to develop its work in the deprived areas of London and to expand to
the deprived areas of Birmingham. We are now able to work with more
people and achieve much greater impact.
We know that our work makes a difference because we have been
evaluating the Beautiful Boroughs Project for three years and our
evaluations consistently show that the practical results of our work are
stronger, cleaner and more connected communities in which people feel
empowered and active.
Ocado is CleanupUK’s first significant corporate supporter and occupies a
very special position in CleanupUK’s family. I am looking forward to achieving
great things in partnership with our wonderful new friends at Ocado”.
George Monck, Chief Executive, CleanupUK
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Strategic ReportStock Code: OCDO | www.ocadogroup.com OUR
People
ALL EMPLOYEES
9
8
5
,
8
:
4
1
0
2
1
8
1
,
0
1
:
5
1
0
2
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0
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,
1
1
:
6
1
0
2
9
9
7
,
2
1
:
7
1
0
2
ALL EMPLOYEES BY GENDER
Male: 10,423
Female: 2,376
SENIOR MANAGERS
Male: 9
Female: 1
DIRECTORS
Male: 8
Female: 3
WE RECRUIT TALENT
Our business is built on innovation, on finding
solutions, and on delivering world class service. Our
people are critical to us achieving our strategy. We
are committed to hiring and developing the highest
quality talent throughout Ocado.
We operate in sectors and locations where there
is strong competition for workers. We keep our
recruitment processes under constant review and
evolve them to make it easy to apply to work for
Ocado while maintaining our high standards. This
has allowed us to remain flexible and agile and
respond to the changing labour market by using
new attraction methods.
Our third Customer Fulfilment Centre in Andover has
been steadily growing its workforce as the demands
of the business increase. To support this, we have
prioritised building links with our local community
there.
Our fourth and largest CFC, opening in Erith in 2018,
will result in significant growth which in turn will
provide even more opportunities for existing and
new employees.
In September 2017 we brought in a record 49
university graduates under our nine separate
training schemes, covering General Management,
Retail, Human Resources, Finance, Engineering,
Engineering Operations, Operations Management,
Logistics Development and Technology, cementing
our place as a significant employer and creator of
new graduate jobs.
We have also revised the way we train our new
drivers, we call them Customer Service Team
Members, creating a more efficient training
programme, resulting in better skilled employees.
DIVERSITY
Ensuring that the Ocado workforce has the diversity of
talent and expertise that it needs ensures that the business
continues to both grow and innovate.
Our equal opportunities policy is dedicated to creating
an environment for our employees that is free from
discrimination, harassment and victimisation, reflecting
our commitment to creating a diverse workforce and
environment that supports all individuals irrespective
of their gender, age, race, disability, sexual orientation,
or religion. We are pleased to have been accredited as a
Disability Confident Leader at our CFC in Dordon.
The Equality Act 2010 (Gender Pay Gap Information)
Regulations 2017 came into force in April 2017. Ocado has
carried out gender pay reporting and has published the
results of the analysis on our website.
The charts on the left show a breakdown of the number
of people who were on the Board, Senior Managers and
employees of the Group at the end of the period by number
and gender.
DOING THE RIGHT THING
The Ocado Citizenship Code sets out our most important
legal obligations and helps colleagues follow key policies,
including our anti-bribery, corruption, money laundering,
competition law and whistleblowing policies. The
Citizenship Code and these policies underpin the Group’s
key principles and standards governing business conduct
towards our key stakeholder groups. It explains our
responsibilities as a Company and as individuals and acts
as a reference guide that is made available to all employees
from day one.
The chart above includes Alex Mahon, who
retired from the Board on 13 December 2017
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This year, because of our continued
growth, we reviewed the Council
structure in our largest business area,
Service Delivery. The single tiered
structure has been replaced with
regional Councils to enable more
focused discussions and resolutions to
area specific issues.
In addition, Ocado maintains a
voluntary union recognition agreement
with USDAW, which is integrated with
our Ocado Council, to voice the views of
our hourly paid employees.
REWARD AND BENEFITS
In September we reviewed our reward
and benefit providers to ensure we
continue to provide choice and flexibility
for our employees. This included
changes to the pension offering at
Ocado, which means employees
can choose and amend their level of
investment at any time and Ocado will
match contributions up to 7% of base
salary.
Ocado has always taken employee well-
being seriously. We have an established
Employee Assistance Provider available
24 hours a day and we’ve recently
invested significantly in additional
services that demonstrate we care
about the physical, mental and financial
health and well-being of our employees.
Well-being events are run across all of
our sites and on-site catering services at
our larger sites serve healthy balanced
meals.
ENGAGING WITH OUR PEOPLE
Communication is key to innovation
at Ocado. Enabling colleagues to
work across the business and share
best practice allows us to leverage the
value of our employees and encourage
innovation. This year, Ocado invested
in enhancing the way we communicate
and engage with all of our people
through the implementation of our
digital communications strategy. Fuse
is our mobile-first communication,
collaboration and learning platform,
which puts self-development and the
ability to share information in the hands
of our employees. Our social platform,
available as a downloadable app on
any device as well as on desktop, is
going from strength to strength with
adoption rates steadily increasing even
across our harder to reach employees.
Open communities within the platform
allow colleagues to communicate with a
wider network of people and so access
information and resources that were
previously unavailable to them.
Our commitment to listen and
encourage formal two-way feedback
is also demonstrated by our new
look employee survey – “MiVoice”.
Employees, previously invited to
participate annually, are now able to
respond in a bite-sized ‘pulse’ style
approach. Fewer questions asked more
frequently, with results turned round in
days instead of months, is enabling our
business to respond, adapt and change
to meet employee needs at a pace that
matches our agile culture.
The Ocado Council helps us to identify
areas where we can improve as an
employer and encourage participation
and consultation in the decisions we
make. This was illustrated in a two year
£1 million project to upgrade our public
facing CSTM and LGV driver uniforms, an
initiative that was driven by the Ocado
Council through engagement with
employees across the organisation.
STRATEGIC REPORT APPROVAL
The Company's Strategic Report is set out on pages 06 to 47.
The Strategic Report is approved by the Board and signed on its
behalf by
Neill Abrams
GROUP GENERAL COUNSEL AND COMPANY SECRETARY
Ocado Group plc
Registered in England and Wales
Number 07098618
6 February 2018
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 OUR
OUR
Governance
Governance
Chairman’s Governance Overview
00
Chairman’s Governance Overview
00
Board of Directors
Board of Directors
Statement of Corporate Governance
00
Statement of Corporate Governance
Leadership and Effectiveness – Nomination Committee Report 00
Leadership and Effectiveness – Nomination Committee Report
Accountability – Audit Committee Report
00
Accountability – Audit Committee Report
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
Annual Statement from the
Annual Statement from the Remuneration
Remuneration Committee Chairman
Committee Chairman
Description of the Remuneration Committee
Description of the Remuneration Committee
Remuneration Policy Report
Remuneration Policy Report
Annual Report on Remuneration – 2017
Annual Report on Remuneration – 2017
Annual Report on Remuneration – Implementation
Annual Report on Remuneration – Implementation
of Policy for 2018
of Policy for 2018
00
00
00
00
00
00
Directors’ Report
Directors’ Report
50
52
54
62
64
70
70
72
74
91
107
110
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CHAIRMAN’S
Governance Overview
“The Board... and the Group
as a whole, needs to be
aware of the interests of its
employees, customers and
suppliers and the Group’s
impact on wider society.”
Lord Rose
CHAIRMAN
DEAR SHAREHOLDER,
On behalf of the Board, I am pleased to present Ocado’s Statement of Corporate Governance for 2017.
The Board is mindful of the corporate governance reforms and proposed changes in legislation that are intended
to encourage responsible corporate behaviour. The reforms appear to be aimed at ensuring that in growing a
business for the longer-term interests of its shareholders, a board is mindful of the company’s broader purpose
and its responsibilities to a broader stakeholder group. The Board, in its decision making processes, and the Group
as a whole needs to be aware of the interests of its employees, customers and suppliers and the Group’s impact
on wider society. Delivering sustainable performance is core to the Board’s regular deliberations, but we must
ensure that we find appropriate time to engage with the Group’s employees and get insight on our customers and
supply base and our corporate responsibility plans. These reforms also highlight the importance of ensuring that
the Company’s purpose, strategy and values are fully aligned and clearly articulated. This Annual Report provides
some information on engagement and other issues. We expect to report more fully on these matters when the new
reporting requirements come into force next financial year. This information will help the reader understand how
stakeholder relationships are taken into account in the Board’s decision making as well as providing shareholders
with information to allow them to understand the strategy, development, performance and impact of the Group’s
activity, including potential long-term outcomes.
ACCOUNTABILITY AND RISK
The Board periodically discusses risk management, the Group’s risk appetite and the principal risks facing the Group.
As well as debating principal risks and the potential impact on the business of the UK leaving the European Union
we considered some risk areas in detail. The Group engaged external consultants to carry out a comprehensive
review of our cyber security arrangements and to assess our data and information security controls and processes.
Given the importance of these issues to the Group generally and the growth of the Ocado Solutions business, the
Audit Committee will closely monitor the Group’s cyber security plans.
The Audit Committee has played an important role in monitoring the Group’s risk and assurance systems. Some of
this oversight includes reviewing existing assurance arrangements and so external advisers were engaged to carry
out a detailed review of the Internal Audit function. Implementation of the recommendations from the review will be
monitored by the Audit Committee in 2018.
REMUNERATION AND ENGAGEMENT WITH SHAREHOLDERS
Our Executive Director remuneration arrangements are designed to incentivise and support the achievement of
our business objectives and sustain long-term value for shareholders. The Remuneration Committee oversees the
Directors’ Remuneration Policy, which received strong shareholder support at the annual general meeting on 3 May
2017. As the Group’s strategy and development evolves we expect to continue to engage with our shareholders on
changes to the executive remuneration arrangements.
LEADERSHIP AND BOARD EFFECTIVENESS
The Board needs to ensure that we have the right people and leadership in our Group to support the strategy
and plans of the Group. As well as reviewing management succession plans, the Board has considered Board
composition. The report, put together by external consultants, concerned Board composition and succession
plans and the existing and desired skill sets of the Board. This important piece of work will form the basis of Board
discussions in 2018 as we consider the make-up of the Board that will best support the business as it moves into the
next stage of development.
Our Senior Independent Director, Alex Mahon, retired from the Board after the period end on 13 December 2017. Alex
was with Ocado for over five years and we thank her for her valuable contribution to the Company and the Board
and wish her well in the future.
Lord Rose
CHAIRMAN
Ocado Group plc
6 February 2018
50
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 2017 GOVERNANCE HIGHLIGHTS
• Emma Lloyd joined the Board at the start of the period as a Non-
Executive Director. Robert Gorrie retired from the Board in May 2017
and Alex Mahon retired from the Board following the period end in
December 2017.
• A review of the Directors’ Remuneration Policy completed by the
Remuneration Committee and approved by shareholders at the 2017
annual general meeting.
• Remuneration consultant, PricewaterhouseCoopers LLP, appointed
after a tender carried out by the Remuneration Committee.
• Auditor tender completed by the Audit Committee, which resulted
in new external auditors, Deloitte LLP, being appointed at the 2017
annual general meeting.
• Recommendations from external 2016 Board evaluation largely
implemented by management.
• Recommendations agreed by Audit Committee from external review
of Internal Audit function.
• External report on Board composition and succession plans.
STATEMENT OF CORPORATE GOVERNANCE
The Statement of Corporate Governance for 2017 covers the following
areas:
•
•
•
•
the structure and role of the Board and its committees;
the Board’s effectiveness;
relations with the Company’s shareholders and the AGM; and
the reports of the Nomination Committee and the Audit Committee.
The report of the Remuneration Committee is set out separately in the
Directors’ Remuneration Report on pages 70 to 109. The Group’s risk
management and internal control framework and the Group’s principal
risks and uncertainties are described on pages 38 to 41.
These sections form part of this Statement of Corporate Governance. The
Directors’ Remuneration Report on pages 70 to 109, the Directors’ Report
on pages 110 to 117 and the going concern and viability statements
on page 39 also contain information required to be included in this
Statement of Corporate Governance, and so are incorporated into this
statement by reference.
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51
Our GovernanceStock Code: OCDO | www.ocadogroup.com BOARD OF
Directors
Front row seating L–R
Back row standing L–R
LORD ROSE
Chairman, 68
TIM STEINER, OBE
Chief Executive Officer, 48
RUTH ANDERSON
Non-Executive Director, 64
ALEX MAHON
Non-Executive Director, 44
(Retired from the Board on 13 December 2017)
JÖRN RAUSING
Non-Executive Director, 57
The Directors' biographies are
found on pages 116 and 117
EMMA LLOYD
Non-Executive Director, 48
ANDREW HARRISON
Non-Executive Director, 47
DUNCAN TATTON-BROWN
Chief Financial Officer, 52
DOUGLAS MCCALLUM
Non-Executive Director, 51
MARK RICHARDSON
Chief Operations Officer, 53
NEILL ABRAMS
Group General Counsel and Company Secretary, 53
52
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 LENGTH OF TENURE OF CHAIRMAN
AND NON-EXECUTIVE DIRECTORS
GENDER DIVERSITY
BOARD INDEPENDENCE
2
:
s
r
a
e
y
3
-
0
2
:
s
r
a
e
y
6
-
3
2
:
s
r
a
e
y
0
1
-
6
1
:
s
r
a
e
y
+
0
1
8
3
4
0
4
3
Whole Board
Executive
Non-Executive
Male
Female
Executive Director 36%
Chairman 9%
Independent Non-Executive Director 55%
MIX OF KNOWLEDGE AND EXPERIENCE ON THE BOARD
Retail
5
Technology
International Operations
5
4
E-Commerce
Finance/Accounting
Automated Engineering
3
2
3
1. The charts on this page include Alex Mahon, who retired from the Board on 13 December 2017, and exclude Luke Jensen, who will join the Board with effect from 1 March 2018.
For more information on the composition
of the Board see page 56
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53
Our GovernanceStock Code: OCDO | www.ocadogroup.com
STATEMENT OF
Corporate Governance
LEADERSHIP
Board Structure
The structure of the Board is designed to ensure that the Board focuses on strategy, monitoring the performance of the Group and governance, risk and
control issues.
The following diagram shows the role of the Board and its committees and management.
BOARD OF DIRECTORS
The Board is collectively responsible for the long-term success of the Company. The business of the Company is managed by
the Board who may exercise all of the powers of the Company. The Board delegates certain matters to the Board committees,
and delegates the detailed implementation of matters approved by the Board and the day-to-day operational aspects of the
business to the Executive Directors.
business to the Executive Directors
AUDIT COMMITTEE
Reviews and reports to the
Board on the Group's financial
reporting, internal control and
risk management systems, the
independence and effectiveness
of the external auditors and
the effectiveness of the Internal
Audit function.
REMUNERATION COMMITTEE
Determines the remuneration,
bonuses, long-term incentive
arrangement, contract terms
and other benefits in respect
of the Executive Directors, the
Chairman and the Company
Secretary.
NOMINATION COMMITTEE
Undertakes an annual review
of succession planning and
ensures that the membership
and composition of the Board,
including the balance of skills,
remain appropriate.
CHIEF EXECUTIVE OFFICER
•
Leads the Executive
Directors
Represents management
on the Board
•
EXECUTIVE DIRECTORS
•
Day-to-day management of
the Group's operations
Operations and results of the
Group
•
•
Execute the strategy once
agreed by the Board
MANAGEMENT COMMITTEE
•
Implements and oversees
operational management
RISK COMMITTEE
Oversees the Group's
risk register, risk control
processes and disaster
recovery planning.
INFORMATION
SECURITY COMMITTEE
Monitors the Group's
information security
measures and oversees
changes to security
systems.
TREASURY COMMITTEE
Oversees the treasury
policy concerning
the Group's cash and
deposits, investments,
foreign exchange and
interest rates.
SAFETY STEERING
COMMITTEE
Oversees the Group's
health, safety
and environment
management systems
and monitors the
progress of safety
plans.
CAPITAL EXPENDITURE
GROUP
Reviews and
authorises capital
expenditure projects,
overspends and
property expenditure,
in accordance with
agreed limits.
CHAIRMAN
•
•
Leads the Board
Promotes high standards
of governance and ensures
effectiveness
Sets the Board's agenda
•
•
SENIOR INDEPENDENT
DIRECTOR
•
Provides a sounding board
for the Chairman
Serves as an intermediary
for the other Directors
• Discusses any concerns with
shareholders
NON-EXECUTIVE DIRECTORS
Constructively challenge
•
the Executive Directors
• Monitor the delivery of the
Group’s strategy within the
risk and control framework
set by the Board
COMPANY SECRETARY AND
GROUP GENERAL COUNSEL
Ensures that Board
•
procedures are followed
• Governance matters
•
Ensures that informaton
flows between management,
the Board and its committees
Indicates delegation
Indicates Board support
The primary responsibilities of the Chief Executive Officer, the Chairman, the Senior Independent Director, the Company Secretary and the Non-Executive Directors
are set out in writing and provide a system of checks and balances in which no individual has unfettered decision-making power.
Certain detailed aspects of the Board’s responsibilities are delegated to the Executive Directors. The Executive Directors carry out some of these responsibilities
through executive-led committees. These committees, whose roles are set out above, formally report to the Executive Directors, and may provide reports to the
Board or Board committees from time to time. The Management Committee comprises the Executive Directors and ten members of management.
The reports by each Board committee are given in this Annual Report. The full terms of reference for each Board committee are available on the Company’s
corporate website www.ocadogroup.com
54
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
WHAT THE BOARD DID THIS YEAR
The Board’s activities are structured through the year to develop and support the delivery of the Group’s strategy. The Board’s discussions throughout the
year were focused on our strategic objectives: Driving Growth, Maximising Efficiency and Utilising Proprietary Knowledge. The Board also regularly discussed
governance, risk management and the Group’s financial performance. The table below sets out some of the Board’s key areas of focus and discussions through
the year and how these developed and support our strategy.
RESPONSIBILITY
STRATEGY, PERFORMANCE
AND FINANCING
REPORTING, RISK MANAGEMENT
AND ACCOUNTABILITY CONTROLS
OVERSIGHT OF THE GROUP'S OPERATIONS
AND TECHNOLOGY DEVELOPMENT
PEOPLE, GOVERNANCE
AND CORPORATE RESPONSIBILITY
SPECIFIC ACTIONS DURING THE PERIOD
Annual strategy conference to review and
set the Group’s strategy. Overseeing Ocado
Solutions negotiations and discussions.
Monitoring grocery retail competitor activity.
Receiving reports from senior management
on trading, business performance and
financing.
Reviewing major strategic initiatives including
Ocado Solutions transition.
Annual review of key risks and risk appetite
and reviewing reports of risk management.
Review of reports on specific risk areas
including OSP control environment.
Reviewing and approving the Group’s
regulatory announcements and reports.
Reviewing reports on health, safety and
environment, litigation, investor relations and
legal and company secretarial matters.
Approving the annual budget, the business
plan for the Group and individual capital
expenditure projects.
Receiving reports on patent protection of
the Group’s technology.
Receiving regular reports on key projects
including new technologies, IT replatforming
and development and ramp-up of the
Andover and Erith CFCs.
Receiving report on people issues. Discussing
Board composition.
Approving the Group’s human rights policy
and modern slavery statement.
Receiving various reports on governance and
regulatory changes.
THE BOARDʼS STRATEGIC/GOVERNANCE ROLE
Entrepreneurial leadership to the Group with
overall responsibility for driving performance
through debate and constructive challenge
of management.
Developing effective leadership in the Board
and throughout the business and ensuring
the right personnel are in place.
Overseas expansion has been an important
focus for the Board during the period as a
significant part of the growth strategy.
The Board is ultimately responsible for
the Company’s risk appetite and viability and
therefore plays a key role in reviewing the
risks that face that business and ensuring that
it has and retains oversight of specific, high
risk areas.
The Board discusses Company-specific risks
and uncertainties, including the environment
in which the business operates such as
cybercrime and climate change.
The Board reviews the Company’s viability
statement and period.
The Board discusses stakeholder issues
through the year, including investor, customer
and employee issues. The Board is updated
regularly on governance matters.
The Board received updates throughout
the year on recruitment and retention, and
discussed the potential impact of Brexit on
the Group’s operations, including the impact
on the Group’s operational strategy.
A key strategy to supporting business growth
is the growth of our technology business.
Our strategy in Europe has driven growth in
the technology business while we continue
to expand our UK development centre in
Hatfield.
Operational efficiency is regularly discussed
and challenged at Board meetings and is
considered an important driver for both
growth and developing our proprietary
knowledge, and therefore the Group’s
strategy.
The commercialisation of Ocado Solutions is a
key strategy for the Group. The Board reviews
IP strategy and Ocado Solutions negotiations
at each Board meeting.
STRATEGIC OBJECTIVES
DRIVING
GROWTH
MAXIMISING
EFFICIENCY
UTILISING
PROPRIETARY
KNOWLEDGE
PRINCIPAL RISKS
Please refer to page 40 for further information about the principal risks for the Group's strategic objectives and the key mitigating activities.
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55
Our GovernanceStock Code: OCDO | www.ocadogroup.com STATEMENT OF
Corporate Governance
COMPOSITION OF THE BOARD
REVIEW OF BOARD AND BOARD COMMITTEE COMPOSITION
As noted on page 62, a number of changes were made to the composition of
the Board. In making changes to the Board, the Board’s review of composition
took into account various considerations including length of Director tenure,
Board diversity, independence and the mix of skills and experience of the
Directors. Some of these considerations are outlined below.
BOARD DIVERSITY
The Board seeks to ensure that its composition, and that of its committees, is
appropriate to discharge its duty effectively and to manage succession issues.
To enable the Board to meet its responsibilities, it is important that the Board’s
composition is sufficiently diverse and reflects a broad range of experience,
skills, backgrounds and perspectives. The Board’s diversity policy includes a
commitment to having a meaningful representation of women on the Board
and in senior positions in the Company.
At the end of the period the Board had 27% female representation, but
following the resignation of Alex Mahon in December 2017, this has now
decreased to 20%. The Board has made significant progress in improving
its gender balance in recent years. In 2009, the Board had no female
representation. Despite this, the Board recognises there is further work to
do to improve female participation in executive and senior management
positions and to improve ethnic diversity on the Board. While it has never
been, in the Board’s opinion, in the best interests of the Company and its
shareholders to set numerical targets for gender or ethnicity on the Board,
the Board is committed to increasing the percentage of women on the Board
and in senior positions in the Company. Any future Board appointments will
continue to be based on objective criteria to ensure that the best individuals
are appointed for the role. For more information on diversity in respect of all
the Group’s employees, see the Our People section on pages 46 and 47. The
chart on page 53 illustrates the diversity of the Board in terms of gender as at
the period end on 3 December 2017.
The policy also includes a commitment to engage only executive search
firms who have signed up to the Voluntary Code of Conduct for Executive
Search Firms. This includes Ridgeway Partners, who were engaged to help the
Company secure new Non-Executive Directors for the Group. The Nomination
Committee monitors these objectives.
BOARD TENURE
The Board also takes into account the length of tenure of existing Directors
when considering reappointment and succession planning. Ruth Anderson
will have served eight years (in March 2018) as a Director. Jörn Rausing has
served as a Director for over 14 years and accordingly his reappointment to
the Board was subject to particular scrutiny (including the importance of
maintaining Board continuity). The chart on page 53 illustrates the tenure of
Directors.
INDEPENDENCE
The Code recommends that at least half of the Board, excluding the Chairman,
should comprise Non-Executive Directors determined by the Board to be
independent. Since, excluding the Chairman, there were six Non-Executive
Directors all determined by the Board to be independent and four Executive
Directors, the Board complies with this recommendation at the end of the
period. Since the retirement of Alex Mahon following the end of the period, the
Board remains compliant with this requirement. The third chart on page 53
illustrates the composition of the Board in respect of the independence of its
members as at the end of the period.
Similarly, the composition of the Audit Committee, Nomination Committee
and Remuneration Committee comply in all respects with the independence
provisions of the Code.
56
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 REVIEW OF BOARD EFFECTIVENESS
The effectiveness of the Board is important to the success of the Group, and the annual review provides a useful opportunity for the Directors to reflect on their
collective and individual effectiveness and consider changes.
2015
2016
2017
Internal performance review of progress
Independent, externally facilitated review
Internal performance review.
Progress against external review assessed
2016
2017
BOARD EFFECTIVENESS REVIEW CYCLE
The Board review for 2017 was carried out internally using two questionnaires.
The online questionnaires were prepared by the Company Secretary with
support from an external and independent consultant, Independent Audit
Limited. One questionnaire asked questions to assess performance in a range
of areas including Board strategy, leadership and culture and sought to gauge
the extent of perceived progress of the Board and the Board committees in the
areas of development identified in the external Board review from 2016 (which
had been carried out by Independent Audit Limited). An assessment of each
individual Director was also carried out using a second questionnaire.
The findings of the review were evaluated by the Company Secretary and the
Chairman, and a Board evaluation report was provided to the Board. The Board
discussed the results of the review. The Board recognised that management
and the Company Secretary had acted upon many of the recommendations
identified in the 2016 review. Some of these actions were aimed at improving
Board communications and included implementing an electronic Board portal
for Board papers and scheduling of more informal meetings between Board
members and between Directors and management. Steps were also taken to
allow the Board more time for discussion of strategic issues. Directors were
asked to identify areas of Board focus for 2018 and common among these were
the importance of overseeing implementation of the new Ocado Solutions
implementation programmes for Groupe Casino and Sobeys and our other
partners. The Board concluded that it had operated effectively throughout the
year. The Chairman of each of the Board committees separately considered
the Board review as it pertained to their committee. The Chairman separately
reviewed the results of the individual Director performance evaluations.
Apart from the formal review of the Board’s effectiveness, the Chairman
and the Non-Executive Directors met without the Executive Directors being
present to discuss the performance of the Board and the Executive Directors.
The Senior Independent Director and the Non-Executive Directors also met
to discuss the performance of the Chairman without the Executive Directors
or the Chairman being present and subsequently met with the Chairman to
provide feedback. The Chairman regularly met with the Executive Directors
and the Deputy Company Secretary during the period, on a range of Company
matters and responsibilities.
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57
Our GovernanceStock Code: OCDO | www.ocadogroup.com STATEMENT OF
Corporate Governance
BOARD ATTENDANCE
Executive Directors
Tim Steiner
Duncan
Tatton-Brown
Neill Abrams
Mark Richardson
11
11
11
11
11
11
10
11
Actual meetings attended
Possible meetings the Director could have attended
BOARD ATTENDANCE
Non-Executive Directors
Lord Rose
(Chairman)
Alex Mahon
Jörn Rausing
Ruth Anderson
Robert Gorrie
Douglas
McCallum
Andrew Harrison
Emma Lloyd
11
11
10
11
10
11
11
11
5
5
11
11
10
11
11
11
Actual meetings attended
Possible meetings the Director could have attended
1. Robert Gorrie retired from the Board
on 3 May 2017.
2. Alex Mahon retired from the Board after
the period end on 13 December 2017.
58
DIRECTOR MEETINGS
The attendance record of the Directors at scheduled
Board meetings during the period is set out in the chart
on the left. The Board scheduled eleven meetings
during the period. Details of attendance at committee
meetings are set out in the relevant committee report.
During the period, the Non-Executive Directors held a
number of meetings without the Executive Directors
present.
DIRECTOR ELECTION
Each Director is required under the Articles to retire at
every annual general meeting (each Director may offer
himself or herself for re-appointment by the members
at such meeting). At the last annual general meeting on
3 May 2017, all of the current Directors (except Robert
Gorrie who was retiring) stood for re-appointment, and
were duly elected with a range of 97.51% to 99.95% of
votes cast by shareholders in favour of re-appointment.
All Directors, with the exception of Alex Mahon who
retired from the Board on 13 December 2017, will retire
and seek re-election at the AGM. The explanatory notes
set out in the Notice of Meeting state the reasons why
the Board believes a Director proposed for re-election
at the AGM should be re-appointed. The Board has
based its recommendations for re-election, in part,
on its review of the results from the Board evaluation
process outlined above, on the reviews of the Chairman
(led by the Senior Independent Director) and of the
Executive Directors conducted at the meetings of the
Non-Executive Directors, the Chairman’s review of
individual evaluations, and whether a Director has
demonstrated substantial commitment to the role
(including time for Board and committee meetings
noted below) and other responsibilities, taking into
account a number of considerations including outside
commitments and any changes thereof (outlined
below) during the period.
Luke Jensen, who will join the Board with effect from
1 March 2018, will seek election at the AGM. His
biography is set out in the Notice of AGM.
The rules that the Company has about the
appointment and replacement of Directors are
described in the Directors’ Report on page 111.
EXTERNAL BOARD
APPOINTMENTS AND CONFLICTS
There have been a number of changes to the Directors’
external appointments during the period as set out in
the table below. The Chairman and the Board are kept
informed by each Director of any proposed external
appointments or other significant commitments as they
arise. These are monitored to ensure that each Director
has sufficient time to fulfil his obligations. Each Director’s
biographical details and significant time commitments
outside of the Company are set out in the Directors'
Biographies section on pages 116 and 117.
Director
Lord Rose
Alex
Mahon
Alex
Mahon
Alex
Mahon
Alex
Mahon
Alex
Mahon
Change in
Commitment
Appointed
Chairman of Zenith
Resigned as Director
of The Edinburgh
International
Television Festival
Limited
Resigned as Director
of The Edinburgh
Television Festival
Council
Resigned as Director
of Bandstand
Productions Ltd
Appointed Chief
Executive of
Channel 4
Resigned as Director
of WATV Limited
Effective Date
of Change
September 2017
August 2017
August 2017
September 2017
October 2017
November 2017
1. Alex Mahon retired from the Board after the period end on
13 December 2017.
Whenever a Director takes on additional external
responsibilities, the Board considers any potential
conflicts that may arise. The Board monitors any
potential conflicts of interest. The Companies Act
provides that Directors must avoid a situation where
they have, or can have, a direct or indirect interest that
conflicts, or possibly may conflict, with the Company’s
interests. Boards of public companies may authorise
conflicts and potential conflicts, where appropriate, if
a company’s articles of association permit (which the
Articles do).
Each Director is required to disclose conflicts and
potential conflicts to the Chairman and the Company
Secretary. As part of his or her induction process, a
newly appointed Director completes a questionnaire
which requires him or her to disclose any conflicts of
interests to the Company. Thereafter, each Director has
an opportunity to disclose conflicts at the beginning of
each Board and Board committee meeting and as part
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 of an annual review. One Director declared a potential conflict of interest in
relation to a matter which was being discussed by the Board and which was
appropriately authorised by the Board in accordance with its powers. None
of the other Directors has declared to the Company any actual or potential
conflicts of interest between any of his or her duties to the Company and his
or her private interests and/or other duties, except in the case of the Executive
Directors, each of whom holds the position of Director of the Company and
Director of a number of Group subsidiary companies. The system in place for
monitoring potential Director conflicts remained effective during the period.
BOARD INDUCTION AND PROFESSIONAL DEVELOPMENT
Newly appointed non-executive directors follow a tailored induction
programme, which includes a comprehensive overview of the Group,
dedicated time with Group executives and key management personnel, visits
to customer fulfilment centres and participation in van delivery routes. The
Chairman and the Company Secretary are responsible for reviewing, preparing
and coordinating the induction programme.
The Board and committees receive training, including in specialist areas.
Training is typically arranged by the Company Secretary in consultation with
the Chairman or committee chairman. The members of the Remuneration
Committee received updates from the Remuneration Committee’s
remuneration advisers including on the new remuneration reporting market
practices. Members of the Audit Committee receive written technical updates
from the external auditor to keep them abreast of the latest accounting,
auditing, tax and reporting developments. The Company Secretary also
provides updates to the Board and the committees on governance and
regulatory changes impacting the Group (for example, the requirements of
the new tax strategy reporting regulations).
INFORMATION FOR DIRECTORS
The Chairman is responsible for ensuring that all of the Directors are properly
briefed on issues arising at Board meetings and that they have full and timely
access to relevant information. To enable the Board to discharge its duties, all
Directors receive appropriate information from time to time, including briefing
papers distributed in advance of the Board meetings.
Directors can, where they judge it to be necessary to discharge their
responsibilities as Directors, obtain independent professional advice at
the Company’s expense. The Board committees have access to sufficient
resources to discharge their duties, including external consultants and
advisers.
ENGAGEMENT WITH SHAREHOLDERS
Investor Relations
The Company is committed to keeping shareholders informed of its strategy
and progress. The Chairman has overall responsibility for ensuring that the
Company has appropriate channels of communication with its shareholders
and is supported in this by the Executive Directors. The Company regularly
meets with its large investors and institutional shareholders who, along with
analysts, are invited to presentations by the Company after the announcement
of the Company’s results.
The Company conducts biannual investor roadshows in line with the reporting
cycle and also addresses current and prospective shareholders at various
investment conferences and other events, both in the UK and abroad. The
Board regularly receives feedback from the Company’s brokers, advisers and
the Executive Directors on the views of major shareholders and the investor
relations programme and also receives reports at each Board meeting on the
main changes to the composition of the Company’s share register.
Lord Rose, the Chairman, and the Board of Directors, are available to the
Company’s shareholders for discussions, and have met with various investors
throughout the year to discuss matters such as strategy, corporate governance
and executive remuneration. We held a number of investor days at our
new CFC in Andover throughout 2017 to enable our investors to view the
progress at the new site as it ramps. We also briefed shareholders on our new
segmental reporting.
The Group also engages with shareholders in the event of a substantial vote
against a resolution proposed at an annual general meeting. At the 2017
annual general meeting there were no such votes. The Company Secretary had
consulted shareholders in recent years about the Company’s remuneration
issues and policies and the share allotment shareholder authorities.
At the 2016 annual general meeting, the Company’s share allotment
resolutions received less support than expected by management. The
Company consulted the large shareholders who did not support the
resolutions. The Company Secretary received feedback from the shareholders
that indicated the shareholders had governance policies that were not wholly
aligned with the Pre-Emption Group’s Statement of Principles and Investment
Association guidance. In response to shareholder feedback the Company
changed its approach to share allotment authorities for the 2017 annual
general meeting. For more information on the resolutions proposed for the
2018 AGM, please refer to the Directors’ Report on pages 110 to 117.
FORMAL REPORTING TO SHAREHOLDERS AND
DIRECTORS’ RESPONSIBILITY
The Company reports to its shareholders in a number of ways including
formal regulatory news service announcements in accordance with the
Company’s reporting obligations, trading statements of sales performance
published in March, September and December each year, the half year report,
the preliminary announcement of annual results, the annual report, and
investor presentations slides and videos. The Company makes available these
documents, including this Annual Report and other information concerning
the Company, on its corporate website. All shareholders can choose to receive
an Annual Report in paper or electronic form.
The Company reports its quarterly trading performance, including information
on the growth of the Group’s revenue, average order numbers and size and its
cash and borrowings position. The Company believes that it is important to
update the market on a quarterly basis due to the importance shareholders
place on receiving regular updates about sales and the current competitive
pressures in the UK grocery market. The Group’s rate of sales growth is key
to understanding the extent to which it is achieving one of its key strategic
objectives, driving growth. The Directors take responsibility for preparing
this Annual Report and make a statement to shareholders to this effect. The
statement of Directors’ responsibility on pages 114 and 115 of this Annual
Report is made at the conclusion of a robust and effective process undertaken
by the Company for the preparation and review of this Annual Report. The
Directors believe that these well-established arrangements enable them to
ensure that the information presented in this Annual Report complies with
the disclosure requirements including those in the Companies Act, and is
fair, balanced and understandable and provides the information necessary
for shareholders to assess the Company’s position, performance, business
model and strategy. In addition to this Annual Report, the Company’s internal
processes cover (to the extent necessary) the preliminary announcement, the
half year report, trading statements and other financial reporting.
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59
Our GovernanceStock Code: OCDO | www.ocadogroup.com STATEMENT OF
Corporate Governance
The Company’s internal processes in the preparation and review of this Annual
Report (and other financial reporting) include:
•
•
review of and feedback on iterations of this Annual Report by the Executive
Directors and the full Board;
focused review of specific sections of this Annual Report by the relevant
Board committees;
• Audit Committee review of a management report on accounting
estimates and judgements, auditor and management reports on internal
controls and risk management, accounting and reporting matters and a
management representation letter concerning accounting and reporting
matters (for further information see pages 64 to 69);
• Board and Audit Committee review of a supporting paper specifically
highlighting the parts of this Annual Report that best evidenced how this
Annual Report was fair, balanced and understandable;
• paper from the Company Secretary highlighting how reporting, regulatory
and governance issues had been addressed in this Annual Report;
• Board and Audit Committee review of management reports on
assessments on going concern and viability;
•
•
the Audit Committee regularly reporting to the Board on the discharge of
its responsibilities;
input from both internal and external legal advisers and other advisers to
cover relevant regulatory, governance and disclosure obligations;
• discussions between contributors and management to identify relevant
and material information;
• detailed debates and discussions concerning the principal risks and
uncertainties;
•
•
•
checking of factual statements and financial information against source
materials;
specific Board review of Directors’ belief statement and key statements;
and
separate approval by the Group General Counsel, the Board committees
and the Board.
The statement by the external auditor on its reporting responsibilities is set
out in the Independent Auditor's report on pages 120 to 126.
In addition to this Annual Report, the Group provides other statements to its
shareholders regarding the Group and its operations, including the modern
slavery statement and tax strategy statement. Simultaneously with the
publication of this Annual Report the Group will publish its first gender pay
reporting statement and in due course, the Group will publish its supplier
payments statement. For further information on the Group’s activities in these
areas see the Strategy Report on pages 6 to 47.
THE COMPANY’S ANNUAL GENERAL MEETING
Shareholders will have the opportunity to meet and question all of
the Directors at the AGM, which will be held at 10 am on 2 May 2018 at
Peterborough Court, 133 Fleet Street, London, EC4A 2BB.
A detailed explanation of each item of business to be considered at the
AGM is included with the Notice of Meeting, which will be sent to the
shareholders before the AGM. Shareholders who are unable to attend the
AGM are encouraged to vote in advance of the meeting, either online at
ocadoshares.com or by using the proxy card which will be sent with the
Notice of Meeting (if sent by post) or can be downloaded from the Company’s
corporate website.
At last year’s annual general meeting, all resolutions were passed with votes
in support ranging from 81.17% to 100%.
COMPLIANCE WITH THE CODE
This Statement of Corporate Governance explains how the Company applies
the main principles and complies with all relevant provisions set out in the
UK Corporate Governance Code 2016 issued by the Financial Reporting
Council (the “Code”), as required by the Listing Rules of the Financial Conduct
Authority and meets other relevant requirements including provisions of the
Listing Rules and the Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority.
The Company’s obligation is to state whether it has complied with the relevant
provisions of the Code, or to explain why it has not done so (up to the date of
this Annual Report). The Company has applied the principles and complied
with the provisions of the Code, except for provisions A.1.2, D.1.1 and Schedule
A and D.2.2. These areas of non-compliance are explained below.
Code Provision
Area
Explanation
A.1.2
Senior Independent
Director
D.1.1 and
Schedule A
Design of
performance-based
remuneration
D.2.2
Senior
management
remuneration
During the period, Alex Mahon
was the Senior Independent
Director of the Company. As
explained on page 62, following
her resignation after the period
end, the Company has not yet
appointed a successor Senior
Independent Director.
As explained on page 97, Directors
are not required to retain shares
from share incentive schemes
for a period after leaving the
Company.
As explained on page 73, the
Remuneration Committee
monitors, but does not make
recommendations concerning,
the level and structure of
remuneration for senior
management of the Company.
60
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 The Company aims to explain how its practices are consistent with the principle to which the particular provision relates, contribute to good governance and
promote delivery of business objectives. The Company’s disclosures on its application of the main principles can be found as follows:
Section
Principle
Section of Annual Report
Page
Leadership
Effectiveness
Accountability
Remuneration
Relations with
shareholders
Every company should be headed by an effective board which is collectively
responsible for the long-term success of the company.
There should be a clear division of responsibilities at the head of the company between
the running of the board and the executive responsibility for the running of the
company’s business. No one individual should have unfettered powers of decision.
The chairman is responsible for leadership of the board and ensuring its effectiveness
on all aspects of its role.
As part of their role as members of a unitary board, non-executive directors should
constructively challenge and help develop proposals on strategy.
The board and its committees should have the appropriate balance of skills,
experience, independence and knowledge of the company to enable them to
discharge their respective duties and responsibilities effectively.
There should be a formal, rigorous and transparent procedure for the appointment of
new directors to the board.
All directors should be able to allocate sufficient time to the company to discharge
their responsibilities effectively.
All directors should receive induction on joining the board and should regularly
update and refresh their skills and knowledge.
The board should be supplied in a timely manner with information in a form and of a
quality appropriate to enable it to discharge its duties.
The board should undertake a formal and rigorous annual evaluation of its own
performance and that of its committees and individual directors.
All directors should be submitted for re-election at regular intervals, subject to
continued satisfactory performance.
The board should present a fair, balanced and understandable assessment of the
company’s position and prospects.
The board is responsible for determining the nature and extent of the principal risks
it is willing to take in achieving its strategic objectives. The board should maintain
sound risk management and internal control systems.
The board should establish formal and transparent arrangements for considering
how they should apply the corporate reporting, risk management and internal control
principles and for maintaining an appropriate relationship with the company’s auditor.
Executive directors’ remuneration should be designed to promote the long-term
success of the company. Performance-related elements should be transparent,
stretching and rigorously applied.
There should be a formal and transparent procedure for developing policy on
executive remuneration and for fixing the remuneration packages of individual
directors. No director should be involved in deciding his or her own remuneration.
There should be a dialogue with shareholders based on the mutual understanding
of objectives. The board as a whole has responsibility for ensuring that a satisfactory
dialogue with shareholders takes place.
The board should use general meetings to communicate with investors and to
encourage their participation.
Board of Directors
Composition of the Board
Board structure
Board structure
Board structure
Board responsibilities and actions
Board of Directors
Director biographies
Director election
External Board Appointments and
Conflicts
Board Induction and Professional
Development
Information for Directors
Review of Board Effectiveness
Director election
Strategic Report
How we manage our risks
Going concern statement, Viability statement
How we manage our risks
Audit Committee Report
Directors’ Remuneration Report
Directors’ Remuneration Report
Engagement with shareholders
Engagement with shareholders
52
56
54
54
54
55
52
116
58
58
59
59
57
58
6
38
39
38
64
70
70
59
59
Certain parts of this Statement of Corporate Governance have been reviewed by the Company’s external auditor, Deloitte, for compliance with the Code, to the
extent required.
Further information on the Code can be found at www.frc.org.uk/directors/
corporate-governance-and-stewardship/uk-corporate-governance-code
BOARD APPROVAL OF THE STATEMENT OF CORPORATE GOVERNANCE
This separate Statement of Corporate Governance is approved by the Board and signed on behalf of the Board by its Chairman and the Group General Counsel
and Company Secretary.
Neill Abrams
GROUP GENERAL COUNSEL AND COMPANY SECRETARY
Lord Rose
CHAIRMAN
Ocado Group plc, Registered in England and Wales, number 07098618
6 February 2018
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61
Our GovernanceStock Code: OCDO | www.ocadogroup.com LEADERSHIP AND EFFECTIVENESS —
Nomination Committee Report
“The Group completed
another examination of
Board composition and
succession plans during the
period.”
Lord Rose
NOMINATION COMMITTEE
CHAIRMAN
DEAR SHAREHOLDER,
I am pleased to present the report of the Nomination Committee for the 53 weeks ended 3 December 2017.
After a number of Director changes in recent years, the Group completed another examination of Board composition
and succession plans during the period, with a view to identifying the Board composition that might best support
the Group’s next phase of development. In reviewing Board composition it was noted that a number of Directors
were approaching or had exceeded six years on the Board and accordingly some changes to the Board were likely
in the medium term.
The review was facilitated externally by Calibro, an external and independent consultant (without any connections
to the Company). Calibro carried out a detailed review of Board skills, composition and succession requirements,
which included conducting interviews with all of the Directors and some members of senior management and
reviewing the make-up and tenure of the current Board. The report contained findings on the current composition
of the Board, its size, its diversity, its current capabilities, the Board culture and the leadership team. The report
also identified areas where the Board should evolve both to meet the expected future needs of the business and
to ensure appropriate successors for certain Director roles. The skill set of the Board, although relevant to the
current needs of the business, which is primarily focused on grocery retail and e-commerce in the UK, would need
to expand. In future, the business is expected to grow as a result of the Group’s increasing focus on the Ocado
Solutions business. Growing the Ocado Solutions business is likely to result in significant investment internationally
and in the areas of technology and software development, robotics and manufacturing. Future leaders of the
business will collectively need to reflect this broader capability, so that the Board skills meet the future strategic
direction of the Group.
On 14 December 2017, following the period end, we announced the retirement of Alex Mahon from the Board with
immediate effect. Alex was appointed Chief Executive of Channel 4 in autumn 2017. Her responsibilities in that
position meant that she felt unable to dedicate enough time to her position as a Non-Executive Director of Ocado.
We thank Alex for her valuable contribution during her five years with the Company and wish her well in the future.
Based on Alex's departure and the skill set analysis, the Board expects to meet in early 2018 to identify and agree
some objectives and timing for planned changes to the Board. It is likely the Board will make a number of Non-
Executive Director appointments in the next 24 months, both to prepare the Board for the departure of retiring
Directors and to identify candidates meeting the identified skill sets. The Board concluded that because of these
planned changes in the short term, an interim Senior Independent Director was not appointed following Alex
Mahon's departure from the Board.
In addition to reviewing Board composition, the Nomination Committee oversees the process of succession
and management development for the Executive Directors and the next layer of management, the Management
Committee. The Nomination Committee reviewed these succession plans and discussed the areas identified
where additional senior management experience would be helpful, particularly in relation to parts of the business
experiencing significant expansion. In the period, Luke Jensen was recruited as Chief Executive Officer of Ocado
Solutions, to assume management responsibility for this business and to drive its rapid expansion. Luke will join the
Board on 1 March 2018 as the Directors believe that it is important to have the Solutions business represented at
Board level.
With regard to the development of the management team, two senior managers regularly attend the Board
meetings to report on their respective business areas, while the Board has exposure to other senior managers who
present or report to the Board on their business areas or particular projects. The Nomination Committee is mindful
that it could improve the extent of its exposure to the senior management and expects to expand on existing
arrangements for building relationships between Non-Executive Directors and senior management outside of
formal Board meetings.
The Nomination Committee is mindful of the corporate governance developments in the areas of diversity and
gender balance including the changes to the Disclosure Guidance and Transparency Rules. The Board plans to
review, in 2018, its existing policies and objectives for Board and management diversity and will report on this
review in the next annual report.
For further information on Board composition, diversity and independence, see the Statement of Corporate
Governance on pages 54 and 61.
I will be available at the AGM to answer any questions about the work of the Nomination Committee.
Lord Rose
NOMINATION COMMITTEE CHAIRMAN
6 February 2018
62
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 MEMBERSHIP AND MEETINGS
The membership and attendance of the Nomination Committee, together with the appointment dates, are set out below.
LORD ROSE
Chairman
Nomination Committee
member since 11 March 2013
Number of meetings: 2
Number attended: 2
DOUGLAS
MCCALLUM
Nomination Committee
member since 3 October 2011
Number of meetings: 2
Number attended: 2
JÖRN RAUSING
Nomination Committee
member since 9 March 2010
Number of meetings: 2
Number attended: 2
ANDREW
HARRISON
Nomination Committee
member since 1 March 2016
Number of meetings: 2
Number attended: 2
RUTH ANDERSON
Nomination Committee
member since 9 March 2010
Number of meetings: 2
Number attended: 2
EMMA LLOYD
Nomination Committee
member since 1 December 2016
Number of meetings: 2
Number attended: 2
As required under the terms of reference, the Nomination Committee has six members, all of whom are independent Non-Executive Directors, and holds a
minimum of two meetings a year. Emma Lloyd became a member of the Nomination Committee on her appointment to the Board as Non-Executive Director on
1 December 2016. Alex Mahon was a member of the Nomination Committee until she retired from the Board on 13 December 2017. She attended all the
Committee meetings in the year. The biography of each member of the Nomination Committee is set out on pages 116 and 117. Other attendees at the
Nomination Committee meetings include the Chief Executive Officer and the People Director. The Deputy Company Secretary is the secretary to the Nomination
Committee.
Annual Review: In addition to its annual performance evaluation, discussed in the Statement of Corporate Governance on page 57, the Nomination Committee
carried out a review of its terms of reference during the period. The review resulted in no changes to the terms of reference. The Committee’s terms of reference
can be found on ocadogroup.com.
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Our GovernanceStock Code: OCDO | www.ocadogroup.com ACCOUNTABILITY —
Audit Committee Report
“Our report provides insight
on our role, which is to
oversee the Company’s
financial reporting,
assurance framework and
internal controls.”
Ruth Anderson
AUDIT COMMITTEE CHAIRMAN
DEAR SHAREHOLDER,
As Chairman of the Audit Committee, I am pleased to present the report of the Audit Committee for the 53 weeks
ended 3 December 2017.
Our report provides insight on our role, which is to oversee the Company’s financial reporting, assurance framework
and internal controls.
We considered the significant accounting matters and issues in relation to the financial statements and in this
report we explain why the issues were considered significant, which provides context for understanding the Group’s
accounting policies and financial statements for the period.
It is over three years since the Internal Audit function was established and so the Audit Committee thought it timely
to commission an independent third party review of the effectiveness of Internal Audit. This report outlines the key
findings from that review.
Deloitte became the Group’s external auditor during the period, following shareholder approval of their
appointment in May 2017. This report outlines the steps taken by the business to help with a smooth transition from
outgoing auditors, PricewaterhouseCoopers.
I will be available at the AGM to answer any questions about our work.
Ruth Anderson
AUDIT COMMITTEE CHAIRMAN
6 February 2018
MEMBERSHIP AND MEETINGS
The membership and appointment dates of the Audit Committee members, together with details of each member’s
meeting attendance, are set out below.
RUTH ANDERSON
Chairman
Audit Committee member since 9 March 2010
Number of meetings: 5
Number attended: 5
Relevant sector experience: Retail
ANDREW HARRISON
Audit Committee member since 1 March 2016
Number of meetings: 5
Number attended: 4*
Relevant sector experience: Retail, Technology
* Andrew Harrison did not attend an ad hoc Audit Committee meeting due to family illness.
Alex Mahon was a member of the Audit Committee until she retired from the Board on 13 December 2017. She attended all the
Committee meetings in the year.
64
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 As required under the terms of reference, the Audit Committee members
are independent Non-Executive Directors and the Audit Committee has
held a minimum of three meetings a year. Alex Mahon was a member of the
Committee until she retired from the Board on 13 December 2017. The timing
of meetings coincide with key intervals in the reporting and audit cycle for the
Group. The Chairman of the Audit Committee reports at each Board meeting
on the business conducted at the previous Audit Committee meeting, any
recommendations made by the Audit Committee and the discharge of its
responsibilities as set out in this report.
At least one member of the Audit Committee (Ruth Anderson) is considered
by the Board to have competence in accounting and all members have recent
and relevant financial experience. Ruth Anderson is a chartered accountant
with the Institute of Chartered Accountants in England and Wales. In line with
the UK Corporate Governance Code, the Audit Committee as a whole has
competence relevant to the sectors in which the Company operates, notably
the retail and technology sectors. Details of each Audit Committee member’s
relevant sector experience can be found in the diagram above. The biography
of each member of the Audit Committee is set out in the Board of Directors
section on pages 116 and 117.
Regular attendees at the Audit Committee meetings include the Chief
Financial Officer, the Group General Counsel and Company Secretary, the
Finance and Risk Director, the Head of Internal Audit and the external auditor.
Other attendees who attend as required include the Chief Executive Officer,
the Chairman, a number of senior members of the finance department, other
members of senior management and operational teams and other advisers
to the Company. The Deputy Company Secretary is the secretary to the Audit
Committee.
KEY AREAS OF FOCUS FOR THE AUDIT COMMITTEE
The responsibilities of the Audit Committee are set out in its terms of
reference. The Audit Committee has an annual work plan, developed from its
terms of reference, with standing items that the Audit Committee considers at
each meeting, in addition to areas of risk identified for detailed review and any
matters that arise during the year. The main matters that the Audit Committee
considered during the year are described below.
Financial Statements and Reporting: The Audit Committee monitored the
financial reporting processes for the Group, which included reviewing reports
from, and discussing these with, the external auditor. As part of the year
end reporting process the Audit Committee reviewed this Annual Report, a
management report on accounting estimates and judgements, the external
auditor's reports on internal controls, accounting and reporting matters, and
management representation letters concerning accounting and reporting
matters.
Monitoring the integrity of the financial statements of the Company, the
financial reporting process and reviewing the significant accounting issues are
key roles of the Audit Committee. The Board ensures this Annual Report, taken
as a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position, performance,
business model and strategy and the Audit Committee plays an important
role in assisting the Board in reaching those conclusions. For information
concerning the process followed by the Company in preparing this Annual
Report see pages 59 and 60 of the Statement of Corporate Governance. The
Audit Committee also monitors the financial reporting processes for the
Group’s half year report, which is a similar role to the one it carries out for full
year reporting.
New accounting standards: The Audit Committee undertook a review of the
impact of the new international accounting standards on the Group’s financial
statements for forthcoming years, relating to the accounting for revenue
(IFRS 15), for leases (IFRS 16) and for financial instruments (IFRS 9). Of these
standards, although not applying to the period, only IFRS 16 is expected to
have a material impact on the Group’s financial results and financial position
for future periods (when adopted), including requiring the Group to bring
large operating lease commitments onto the balance sheet and the impact
on the Group's EBITDA A , depreciation, debt and operating profit (as well as
other measures). Given its significance, management prepared a quantitative
analysis of the estimated impact of IFRS 16. The Audit Committee reviewed
the management report and the explanatory notes as well as some of the key
management judgements. The Audit Committee sought to ensure that the
most significant changes were clearly explained in this Annual Report. The
Audit Committee: (1) discussed the systems and processes used by the Group
to capture the required lease data information and to monitor lease terms;
(2) reviewed the process used to identify all of the Group's revenue streams
and the revenue recognition assessment used to recognise revenue from
new Ocado Solutions contracts; and (3) reviewed the disclosure contained
in this Annual Report regarding the anticipated impact of the standards on
the Group’s financial results and position (see note 1.2 to the consolidated
financial statements on pages 132 and 133).
Accounting judgements and key sources of estimation uncertainty:
The Audit Committee has assessed whether suitable accounting policies have
been adopted and whether management has made appropriate judgements
and estimates.
The Audit Committee reviewed and discussed reports from management on
accounting policies and accounting issues and estimates in relation to this
Annual Report and sought to assess the reasonableness of the assumptions
and judgements underlying the accounting issues.
The table below summarises those significant issues which received particular
focus from the Audit Committee in relation to the financial statements for the
period and how these issues were addressed. The issues of useful economic
lives of assets and of revenue recognition for new Ocado Solutions contracts
were identified as new significant issues for the period.
A
See Alternative Performance
Measures on page 196
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65
Our GovernanceStock Code: OCDO | www.ocadogroup.com ACCOUNTABILITY —
Audit Committee Report
Issue and Nature of Judgement
or Estimate
Factors and Reasons Considered
and Conclusion
The Audit Committee assessed management
estimates of supplier income and concluded
these were appropriate. For each income stream
the Audit Committee considered the analysis
of historical supplier income and management
reports on internal control for income streams.
Impact on Financial Information
and Disclosure in Financial
Statements
The amount of £87.1 million is
recognised as supplier income.
See notes 2.1 and 3.8 to the
consolidated financial statements
on pages 136 and 151.
Area
Cost of Sales —
Supplier income
(including
commercial
income,
promotional
allowances and
volume rebates)
Revenue
Recognition
Intangible Assets
— Capitalisation
of Internal
Development Time
and Costs
Commercial income continues to be an
area of focus as the quantum of income
recorded is significant to the results of the
period. Some parts of commercial income
require management to apply estimates to
ascertain the amounts and timings of income
to be recognised where it relates to supplier
transactions that span the period end. The
amounts due from suppliers in relation to
promotional activity and volume related sales
targets are material.
Management judgement is required for
recognition of revenue due to the evolving
nature of the business and new services
that are being provided. The accounting for
new Ocado Solutions contracts with a range
of deliverables and fees is complex. They
require management judgement, including
with regards to the timing of recognition and
classification of income under the accounting
standard.
The capitalisation of internal development
costs is material and involves management
judgements as to whether the costs incurred
meet the criteria in accounting standards
for capitalisation, including the technical
feasibility of the project and the likelihood
of the project delivering sufficient future
economic benefits, and the risk of impairment
when new technology supersedes previously
capitalised projects.
Useful economic
lives of assets
The useful economic lives and residual value
of the Group’s assets involves management
estimates. The appropriateness of the
estimated lives were reviewed.
Recognition of
Deferred Tax Asset
The estimates used to support the future
business profitability and recognised deferred
tax asset require management estimate.
The accounting treatment is
included in the Consolidated Income
Statement on page 127. See note
2.1 to the consolidated financial
statements on page 136.
The amount of £42.7 million of
internal development costs has
been capitalised within intangible
non-current assets, as set out in note
3.1 to the consolidated financial
statements on page 144.
The Audit Committee reviewed the appropriateness
of management’s proposed accounting treatment
of existing and new revenue streams including in
light of the expected impact of IFRS 15.
The Audit Committee considered the appropriate
accounting policies for certain new contracts
and taking into account the views of the external
auditor.
Details of material technology projects which
are being capitalised along with the rationale for
capitalisation were presented to and reviewed by
the Audit Committee. The criteria for identification
of projects which may be treated as intangible
assets and the process to capture the costs of
these technology projects were discussed by
the Audit Committee. The Audit Committee also
discussed the need for any impairment of the
existing carrying values of capitalised software and
systems recognised as a result of the development
of new software and systems.
The Audit Committee reviewed the reports from
management that explained the justifications
for increasing the economic lives of some of the
Group’s assets and the resulting impact on the
Group’s depreciation charge and profitability
including management's estimates based on
longer historical experience with the use of assets.
As a result, the depreciation cost
was reduced by £1.9 million in 2017
and is expected to decrease further
on an annual basis in relation to the
revised assets. See note 3.2 to the
consolidated financial statements
on pages 146 and 147.
The basis of management estimates of future taxable
profits of the Group and the process used to calculate
the deferred tax asset recognised were reviewed by
the Audit Committee. The Audit Committee assessed
the reasonableness of the assumptions underlying
the Group's future profits forecasts.
The amount of £14.3 million was
recognised in the Consolidated
Balance Sheet for the period. Details
of the deferred tax asset are set out in
note 2.8 to the consolidated financial
statements on pages 140 to 142.
The table above is not a complete list of all the Group’s accounting issues, estimates and policies, but highlights the most significant ones for the period in the
opinion of the Audit Committee. Accounting for share-based payments and exceptional items A are recurring issues, but did not require a significant estimate or
judgement during the period, unlike some previous periods.
A
See Alternative Performance
Measures on page 196
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 The accounting treatment of all significant issues and judgements was
subject to review by the external auditor. For a discussion of the areas of
particular audit focus by the external auditor, refer to pages 121 to 122 of
the Independent Auditor's Report. The Audit Committee considers that the
Company has adopted appropriate accounting policies and made appropriate
estimates and judgements.
Segmental Reporting: As with previous years, the Audit Committee
considered the Group’s approach to segmental reporting. Given the recent
Ocado Solutions transactions, the Board started to review performance of
the Group by segment and considered it appropriate to adopt segmental
reporting for the Group for year end. This Annual Report reports the Group’s
two segments, retail and solutions, for the first time. The Audit Committee
considered the accounting impact of IFRS 8 (“Operating Segments”) and the
external reporting disclosures for the Group.
Going Concern and Viability Assessments: The Audit Committee and the
Board reviewed the Group’s going concern and viability statements (as set
out on page 39) and the assessment reports prepared by management in
support of such statements. The Audit Committee gave careful consideration
to the period of assessment used for the viability statement. It took into
account a wide range of factors (as set out on page 39) and concluded
the time period of three years remained appropriate. The external auditor
reviewed management’s assessment and discussed this review with the Audit
Committee.
Tax Review: The Audit Committee also considered the Group’s tax policy,
and concluded that management’s low risk approach to tax management
remained appropriate. The Board reviewed and approved the Group’s tax
strategy statement, published for the first time during the period.
Risk Review: The Board has ultimate responsibility for effective management
of risk for the Group including determining its risk appetite, identifying
key strategic and emerging risks, and reviewing the risk management
framework. The Audit Committee, in supporting the Board to assess the
effectiveness of risk management and internal control processes, relies on
a number of different sources to carry out its work including an assessment
report provided by management, Internal Audit assurance reports and the
assurance provided by the external auditor and other third parties in specific
risk areas. No significant failings or weaknesses were identified in the Group’s
risk management and internal control system for the period. At the end
of the period, the Audit Committee approved management’s proposal to
create a new position, Chief Compliance Officer, to head up a new function
called Governance, Risk and Compliance. The new function has assumed
responsibility for supporting the Group’s risk management processes, such
responsibility having been performed previously by Internal Audit (previously
called Internal Audit & Risk) and to help grow the Group’s risk management
framework. The new function will help bring focus on the Group's risk controls
and processes and actions needed to implement them, particularly as the
business grows.
The Board discussed and reviewed the Group’s risk appetite when reviewing
the principal risks and the strategy for the Group. Regular review of the risk
appetite ensures that the Company’s risk exposure remains appropriate and
acceptable in enabling the Group to achieve its strategic objectives. The Audit
Committee also reviews risk appetite and principal risks when considering the
effectiveness of the risk management system. Every year the Audit Committee
focuses on particular risk areas identified in the Group risk register. During
the period, management reported on the progress of the Group’s business
continuity and disaster recovery plans, the Group’s information security
controls and assurance framework, the programme for complying with the
new General Data Protection Regulation and the control environment for the
new Ocado Solutions business. During the period, PricewaterhouseCoopers
LLP performed a high level cyber security audit covering the Group’s controls
to govern, detect, protect and respond to cyber security incidents. The Audit
Committee considered the high level findings of the review and management’s
responses. The Audit Committee expects to monitor the next phases of
the review in 2018, including the development of a security roadmap for
expanding the Group’s information security arrangements to cater for the
growth of the business. The Audit Committee will continue to receive reports
on these areas in future years. Further details of the risk review and the Group’s
risk management and internal control systems, including financial controls,
are set out in the “How We Manage Our Risks” section on pages 38 to 41.
Internal Audit: Part of the assurance provided to the Audit Committee when
reviewing the effectiveness of the Group’s systems of internal control comes
from Internal Audit. The Audit Committee reviewed the Internal Audit plan in
January 2017 and considered it appropriate to the Group having regard to the
principal risks of the business.
The Internal Audit plan, which is risk based, set out a number of activities
for the period and the 2018 financial year, including assurance programmes
for key strategic projects such as the new CFCs and the Ocado Solutions
technology and control and data integrity models for key projects such as
the General Data Protection Regulation control environment and the Ocado
Solutions business. The programme also includes operational audits for
key operational risk areas such as site security, health and safety and food
and product safety. The Audit Committee reviews the planned internal audit
activities, and its resourcing and prioritisation. Internal Audit reports to each
Audit Committee meeting. Management actions are tracked and the status of
these actions is reported alongside progress against the Internal Audit plan.
These reports enable the Audit Committee to monitor progress, and to discuss
key findings and the plans to address them.
The Audit Committee is satisfied that the Internal Audit plan provides
appropriate assurance on the controls in place to manage the principal risks
facing the Group.
As well as reporting at each Audit Committee meeting on the results of their
work, Internal Audit reports on any cases of whistleblowing, fraud and bribery.
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Our GovernanceStock Code: OCDO | www.ocadogroup.com ACCOUNTABILITY —
Audit Committee Report
ASSESSING THE EFFECTIVENESS OF THE EXTERNAL AUDIT
PROCESS AND THE EXTERNAL AUDITOR
The Audit Committee places great importance on ensuring that there are
high standards of quality and effectiveness in the external audit. Given
Deloitte transitioned into the external auditor role in this period, the Audit
Committee assessment covers a shorter review period than usual although
the assessment still includes most of the half year review work and the year
end audit. The Audit Committee reviewed and approved the annual audit
plan to ensure that it is consistent with the scope of the audit engagement.
In reviewing the audit plan, the Audit Committee discussed the significant
and elevated risk areas identified by Deloitte most likely to give rise to a
material financial reporting error or those that are perceived to be of higher
risk and requiring additional audit emphasis (including those set out in the
Independent Auditor's Report on pages 120 to 126). The Audit Committee also
considered the audit scope and materiality threshold. The Audit Committee
met with Deloitte at various stages during the period, including without
management present, to discuss their remit and any issues arising from the
work of the auditor.
At the end of the period, the Audit Committee reviewed the performance of
Deloitte based on a questionnaire that contained various criteria for judging
their effectiveness and on feedback from management. The criteria for
assessing the effectiveness of the audit included the robustness of the audit,
the quality of the audit delivery and the quality of the people and service. The
questionnaire was completed by members of the Audit Committee, the Chief
Financial Officer and members of the finance department and senior members
of management and operations teams. The results of the questionnaire
were reviewed by the Audit Committee. The Audit Committee also met with
management, including without Deloitte present, to hear their views on the
effectiveness of the external auditor.
The Audit Committee also reviewed the findings from the Financial Reporting
Council’s Deloitte Audit Quality Inspection report (dated June 2017). The Audit
Committee fully discussed with Deloitte the content of the report including the
assessment of the quality of audits reviewed, Deloitte’s response to the report
and actions taken by it, including changes to the firm’s audit methodology
generally and taken into account in the audit plan for the period.
The Audit Committee concluded that Deloitte had transitioned well into the
role and their performance was effective.
Internal Audit effectiveness review: The Audit Committee is responsible for
reviewing the effectiveness of the Internal Audit function each year. This year
an independent review of the effectiveness of Internal Audit was facilitated
externally by Grant Thornton UK LLP. The review followed two years in
which an internally facilitated review had been conducted by the Company
Secretary. Grant Thornton's detailed review of Internal Audit focused on remit
and future direction. The review was based on interviews with a broad range
of stakeholders and members of the Internal Audit function.
The review concluded with a final report and feedback session with
the Chairman and Head of Internal Audit and a discussion at the Audit
Committee meeting. Management presented a proposed response to the
recommendations made in the report, which the Audit Committee discussed.
Among the recommendations to be addressed by Internal Audit were that a
detailed assurance map be presented to the Audit Committee, illustrating all
assurance work across the Group and detailed reasoning for work included in
the internal audit plan and better reporting of the resource allocation made
by the Internal Audit team to different work activities. Internal Audit expects
that the balance of its roles will change in future years to reflect the ongoing
shift in the business from retail only to retail and technology. This will mean
an increase in the amount of assurance work done with respect to the retail
business, while its advisory role will continue with regards to the nascent
Ocado Solutions business. Assurance work on the Ocado Solutions business is
expected to take place as its control environment matures. Feedback from the
stakeholders was consistent in acknowledging the usefulness of the work of
Internal Audit and the value it is delivering for the Group. The Audit Committee
was satisfied that Internal Audit remains effective. The Internal Audit team
will grow slightly and is sufficiently resourced and has adequate levels of
experience and expertise.
Annual Review: In addition to its annual performance evaluation, discussed
in the Statement of Corporate Governance on page 57, the Audit Committee
carried out a review of its terms of reference. The review resulted in changes to
the terms of reference to reflect the new guidance. The Committee’s terms of
reference can be found on ocadogroup.com.
AUDITOR TRANSITION
Deloitte was appointed by the shareholders as the Group’s statutory auditor in
May 2017, following a formal tender process (as described in the 2016 annual
report). Mark Lee-Amies is the lead audit partner. The tender process was
completed in late 2016 which allowed for a smooth handover process from
the Group’s outgoing external auditor, PricewaterhouseCoopers. The Audit
Committee monitored this transition process.
Deloitte were given an induction process to help build on their understanding
of the business. These induction activities included: a planning meeting with
management in early 2017; Deloitte observing the Audit Committee meetings
in January and April 2017; and half year transition planning meetings. In
addition, Deloitte’s role as principal accountant on the Group’s debt issue
(noted below) in respect of the 2017 period aided their understanding of the
business.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 The Audit Committee received a regular report from management regarding
the extent of non-audit services performed by the external auditor. Deloitte
provided a report to the Audit Committee on the specific safeguards put in
place for each piece of non-audit work confirming that it was satisfied that
neither the extent of the non-audit services provided nor the size of the fees
(being 84.1% of the audit fees) charged had any impact on its independence
as statutory auditor. Notwithstanding that the level of non-audit fees was very
high in relation to the external audit fees, it was concluded that appropriate
safeguards were in place to prevent a compromise of auditor independence.
In the case of the debt issuance review work, this was conducted by an
independent specialist team and was a natural extension of the half year
auditor review work, making the auditor most suited to providing the service.
In addition in the case of Deloitte, some of its non-audit services were
provided to the business prior to its appointment as external auditor. The
Audit Committee was satisfied this was the case and so concluded that the
auditor's independence from the Group was not compromised.
Audit Fees: The Audit Committee was satisfied that the level of audit fees
payable in respect of the audit services provided (excluding audit-related
services) (being £345,000 (2016: £322,000)) was appropriate and that an
effective audit could be conducted for such a fee. The existing authority for
the Audit Committee to determine the current remuneration of the external
auditors is derived from the shareholder approval granted at the Company’s
annual general meeting in 2017. At the annual general meeting in 2017,
98.37% of votes cast by shareholders were in favour of granting the Directors
this authority.
STATEMENT OF COMPLIANCE WITH THE COMPETITION AND
MARKETS AUTHORITY (CMA) ORDER
The Company confirms that it has complied with The Statutory Audit Services
for Large Companies Market Investigation (Mandatory Use of Competitive
Processes and Audit Committee Responsibilities) Order 2014 (Article 7.1),
published by the CMA on 26 September 2014, including with respect to the
Audit Committee’s responsibilities for agreeing the audit scope and fees and
authorising non-audit services.
Independence and Objectivity: The Audit Committee considered the
safeguards in place to protect the external auditor's independence. Deloitte
reported to the Audit Committee that it had considered its independence in
relation to the audit and confirmed to the Audit Committee that it complies
with UK regulatory and professional requirements and that its objectivity
is not compromised. The Audit Committee took this into account when
considering the external auditors’ independence and concluded that Deloitte
remained independent and objective in relation to the audit.
Non-Audit Work Carried Out by the External Auditor: To help protect
auditor objectivity and independence, the provision of any non-audit services
provided by the external auditor requires prior approval, as set out in the table
below. These thresholds are unchanged.
Approval Thresholds for
Non-Audit Work
Over £10,000 and up to £30,000 per
engagement
Over £30,000 and up to £100,000 per
engagement
Greater than £100,000 per engagement,
or if the value of non-audit fees to audit
fees reaches a ratio of 1:2 as a result of
a new engagement, regardless of value
Approver
Chief Financial Officer
Chief Financial Officer and Audit
Committee Chairman
Audit Committee
An additional protection is provided by way of a non-audit services fee cap.
The Audit Committee (or the Company) may not approve an engagement of
the external auditor if annual non-audit services fees would exceed 70% of the
average audit fees (not including fees for audit-related services) charged in
the previous three years. Certain types of non-audit service are of sufficiently
low risk as not to require the prior approval of the Audit Committee, such as
“audit-related services” including the review of interim financial information.
“Prohibited services” are those that have the potential to conflict directly
with the auditors’ role, such as the preparation of the Company’s financial
statements.
Non-Audit Work Undertaken During the Period: The total of non-audit fees,
audit fees and audit-related services fees paid to the external auditors during
the period is set out in Note 2.5 to the consolidated financial statements on
page 138. The non-audit services fees of £310,000 paid to Deloitte during
the period related to: (1) services in relation to the Ocado debt issue in
June 2017; (2) audit-related assurance services for an interim review; (3) IT
cyber penetration testing work carried out prior to appointment as external
auditor; and (4) intellectual property legal support work carried our prior
to appointment as external auditor. Non-audit fees of £20,600 were paid to
Deloitte for remuneration advice to the Remuneration Committee (for more
information see page 73). With the exception of services in relation to the debt
issue, all non-audit work engagements were approved by the Chief Financial
Officer as the fees concerned were within the approval thresholds set under
the policy.
The non-audit services fees of £155,000 (2016: £50,000) paid to retiring external
auditors, PricewaterhouseCoopers related to services in relation to the Ocado
debt issue and a controls programme assessment. The appointments of
Deloitte and PricewaterhouseCoopers in relation to the debt issue work were
approved by the Board.
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
“We are encouraged that
shareholder support for the
Company’s remuneration
arrangements has
substantially increased in
recent years.”
Douglas McCallum
REMUNERATION COMMITTEE
CHAIRMAN
ANNUAL STATEMENT FROM THE REMUNERATION COMMITTEE CHAIRMAN
DEAR SHAREHOLDER,
On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for 2017.
We believe that the remuneration of the Executive Directors appropriately reflects the performance of the Group.
Overall total Director remuneration is down against prior periods and incentive based pay is in line with 2016,
reflecting the Group’s lower rates of growth compared to previous years. While the Group achieved strong sales
and customer growth, lower average basket size for ocado.com compared to 2016 impacted business Revenue.
An increase in head office headcount and fixed costs meant EBITDA A remained in line with the prior year. Hence
achievement against the revenue and profitability targets under the incentive plans was modest. In 2017, the Group’s
Revenue grew 15.2% to £1,463.8 million, average orders per week grew 14.8% to 264,000 and EBITDA A for the Group
was flat at £84.3 million for the 53 weeks ended 3 December 2017. Further, although steady progress was made in
developing the Group’s new Ocado Solutions platform, the delay to improvements in the capital and operating
efficiency of Andover meant achievement against these challenging incentive targets was moderate for the period.
RELATIONSHIP BETWEEN PAY AND PERFORMANCE
We have recommended a bonus payment to the Executive Directors based on 41.5% to 42% achievement against
objectives under the bonus plan for the period.
During the period, we reviewed the performance against the 2015 LTIP award targets, which had a performance
period ending on 3 December 2017. The 2015 LTIP awards were subject to the achievement of targets for both the
Group’s retail business and platform business. Based on the 2017 results, the Directors achieved 25% against the
performance targets. The 2015 LTIP awards are expected to vest in March 2018.
Base salaries, which underpin retention of the Executive Directors, were reviewed during the period. An increase of
2.75% was approved, which is in line with the Group’s employee salary percentage increase and business plans.
The Annual Report on Remuneration on pages 91 to 106 contains details of the remuneration paid to Executive
Directors during the period.
KEY CHANGES TO EXECUTIVE DIRECTOR REMUNERATION
We believe that our remuneration framework helps support and drive our strategy, which is focused on growing
the retail business through improvement in the customer proposition and on maximising operational and capital
efficiency of the retail business.
Our objective is also to invest in the Group’s IP and technology to drive growth, both in our retail business and
solutions business. The Remuneration Committee reviews the remuneration framework annually, to make sure that
the AIP, the LTIP and the GIP contain specific performance measures that support this strategy.
During the financial year, we undertook a review of the Executive Director AIP structure and concluded that the
financial measures of Group EBITDA A and Gross Sales A (Retail) remained aligned with the Company’s strategy
and should be retained for 2018 in order to encourage continued strong retail business growth. However, with the
progress in the development of the Solutions business it was agreed that a new Ocado Solutions business target
should be introduced to align with the evolving Group strategy. Further explanation of the changes can be found on
page 107.
The financial performance measures for the 2018 LTIP awards reflect the same equal split in the 2017 awards,
namely between the retail business and the Solutions business but with some changes to the retail profitability
measure reflecting the Group's new segmental reporting. The targets are intended to reward the delivery of an
efficient platform solution and sales of that platform solution to new customers as well as rewarding growth of the
retail business.
CHANGES TO NON-EXECUTIVE DIRECTOR REMUNERATION
The Non-Executive Directors’ annual fees were subject to annual review but the basic fees for Non-Executive
Directors were left unchanged (2016: £50,000). Fee levels have only increased once since April 2014.
EXECUTIVE REMUNERATION AND THE BROADER CONTEXT
The Remuneration Committee is mindful of the proposed corporate governance reforms and changes in legislation
concerning remuneration and its disclosure. The Committee expects to conduct a full review of its remuneration
arrangements in 2018 to coincide with the new requirements coming into force and will report more fully next year.
A
See Alternative Performance
Measures on page 196
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 REMUNERATION AT A GLANCE
Increase in base pay of 2.75%
•
•
Increase in variable pay of 0.8%
• Overall pay for all directors decreased
• Share scheme targets changed for 2018 awards to align with evolving
Group strategic objectives
• Shareholder support for policy and report of 93.75% and 93.16%
• Directors hold about 16.3% of the total share capital
The Remuneration Committee sets the remuneration policy and
remuneration plans in the context of the growth of the Company but
while taking into account workforce pay across the Group. Our overall
remuneration framework is designed to motivate key employees to
achieve the Group's strategic objectives, deliver value for shareholders
and to be competitive.
CHANGE OF ADVISER
Following the appointment of Deloitte as the Company’s external
auditor, the Remuneration Committee conducted a tender for the role
of external remuneration adviser. The result was the appointment of
PricewaterhouseCoopers as the Remuneration Committee’s external
remuneration adviser. The Remuneration Committee would like
to thank Nicki Demby at Deloitte for her advice and support to the
Company. Further details of the tender can be found on page 68.
SHAREHOLDER FEEDBACK AND REMUNERATION
DISCLOSURE
Each year, we review how shareholders voted on the remuneration
report, together with any feedback received. We are aware of
some shareholders’ ongoing concerns regarding transparency
of performance-related remuneration. We have enhanced our
reporting of performance in recent years, which we believe provides
shareholders with clear and understandable information about the
operation of our performance-related incentive schemes. We are
encouraged that shareholder support for the Company’s remuneration
arrangements has substantially increased in recent years, with 93.16%
support for the 2016 Directors’ Remuneration Report and 93.75%
support for the Directors’ Remuneration Policy at the 2017 annual
general meeting.
I will be available at the AGM to answer any questions about the work
of the Remuneration Committee.
Douglas McCallum
REMUNERATION COMMITTEE CHAIRMAN
6 February 2018
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
DESCRIPTION OF THE REMUNERATION COMMITTEE
This section of the Directors’ Remuneration Report describes the membership of the Remuneration Committee, its advisers and principal activities during the
period. It forms part of the Annual Report on Remuneration section of the Directors’ Remuneration Report.
MEMBERSHIP
The current membership of the Remuneration Committee, together with appointment dates, is set out below.
As required under the terms of reference, the Remuneration Committee has three members, all of whom are independent Non-Executive Directors, and holds
a minimum of two meetings a year.
DOUGLAS MCCALLUM
Chairman
Remuneration Committee member since 3 October 2011
Number of meetings: 4
Number attended: 4
RUTH ANDERSON
Remuneration Committee member since 9 March 2010
Number of meetings: 4
Number attended: 4
ANDREW HARRISON
Remuneration Committee member since 1 March 2016
Number of meetings: 4
Number attended: 3*
* Andrew Harrison did not attend one Remuneration Committee meeting due to family illness.
The biography of each member of the Remuneration Committee is set out in the Directors' Report section on pages 116 and 117.
Other attendees at the Remuneration Committee meetings included the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the
People Director and the external adviser to the Remuneration Committee. The Chairman and the Executive Directors and other attendees are not involved in any
decisions of the Remuneration Committee and are not present at any discussions regarding their own remuneration. The Deputy Company Secretary is secretary
to the Remuneration Committee.
EXTERNAL ADVICE
During the period, the Remuneration Committee and the Company retained independent external advisers to assist them on various aspects of the Company’s
remuneration and share schemes as set out below:
Adviser
Retained by
PricewaterhouseCoopers
LLP
Remuneration
Committee
Services Provided to the
Remuneration Committee
Executive remuneration advice including
assisting in a benchmarking review of Executive
Director remuneration. Appointment effective
from June 2017.
Deloitte LLP
Remuneration
Committee
Executive remuneration advice. Appointment
effective until March 2017.
Slaughter
and May
Company
None
Other Services Provided
Advice on a range of remuneration issues.
Separate auditor team engaged until May 2017.
Separate teams engaged by the Company to advise on IT
security and other matters.
Advice on a range of remuneration issues.
Separate team engaged in 2017 as statutory auditor to the
Company.
Share schemes, tax and employment law advice as well
as general UK legal advice in respect of a number of the
Company’s remuneration matters.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 •
•
•
•
•
receiving a report on Group-wide and management remuneration for 2017;
consulting the Chief Executive Officer and the Chairman on performance
and remuneration of the Executive Directors;
receiving reports from advisers on senior executive pay, market themes
and trends;
receiving a report on the Group’s share schemes and plans for 2018;
receiving a report on shareholder feedback on the 2016 annual report and
2017 annual general meeting;
•
reviewing the performance of advisers; and
• agreeing a process and timetable for, and conducting a tender of, the role
of external remuneration consultants.
The Remuneration Committee’s work also included monitoring and
considering the level and structure of remuneration for the Management
Committee. Ultimate decision-making responsibility for the remuneration
of the Management Committee lies with the Chief Executive Officer. This
approach still gives the Remuneration Committee necessary visibility of senior
management remuneration to enable it to formulate appropriate policy and
make decisions regarding Executive Director remuneration, but allows the
Chief Executive Officer, who is best placed to make remuneration decisions
about the management team, the flexibility to do so. The Remuneration
Committee believes this practice is beneficial to the Company and supports
the Code principle D.2.
The Remuneration Committee carried out a review of its terms of reference
during the period, which did not result in any changes.
In addition to the activities of the Remuneration Committee, the Executive
Directors and the Chairman reviewed the remuneration arrangements of the
Non-Executive Directors.
PRICEWATERHOUSECOOPERS LLP APPOINTMENT
Given the appointment of Deloitte LLP (“Deloitte”) as external auditors of the
Company from the 2017 annual general meeting, it was agreed that Deloitte
would not continue as adviser to the Remuneration Committee. Accordingly,
the Remuneration Committee tendered the role of independent external
adviser. The tender concluded in spring 2017 and PricewaterhouseCoopers
LLP (“PwC”) were appointed to the role.
The Remuneration Committee approved and oversaw the tender process,
including agreeing the timetable and tender document.
The Company met with a number of consultants. From this, two shortlisted
firms were invited to submit a written proposal to the Company and to give
a presentation to the Remuneration Committee along with a number of
key Ocado employees. The Remuneration Committee evaluated each firm
using the tender criteria and agreed to appoint PwC. The decision of the
Remuneration Committee to appoint PwC as remuneration adviser was
based on a number of factors, including the strength of their proposal for
services; their understanding of the business and its entrepreneurial culture;
an assessment of their independence from the Company; their client base;
and their proposed fees. PwC operates under the Remuneration Consultants
Group Code of Conduct.
For the period from their appointment on 22 June 2017 to the period end,
£17,000 in advisory fees were paid or payable to PwC for services provided to
the Remuneration Committee. For the period from the start of the period to
their resignation in March 2017, £20,600 in advisory fees were paid or payable
to Deloitte LLP for services provided to the Remuneration Committee. Both
PwC and Deloitte LLP were paid fees on a retainer basis.
OTHER SUPPORT FOR THE REMUNERATION COMMITTEE
In addition to the external advice received, the Remuneration Committee
consulted and received reports from the Company’s Chief Executive Officer,
the Chief Financial Officer, the Chairman, the People Director and the Deputy
Company Secretary. The Remuneration Committee is mindful of the need
to recognise and manage conflicts of interest when receiving views and
reports from, or consulting with, the Executive Directors or members of senior
management.
PRINCIPAL ACTIVITIES OF THE REMUNERATION COMMITTEE
DURING THE FINANCIAL YEAR
The Remuneration Committee has, under its terms of reference, been
delegated responsibility for setting remuneration for all of the Executive
Directors, the Chairman and the Company Secretary. This is outlined on
page 54. In line with its terms of reference, the Remuneration Committee’s
work during the period included the following:
• approving the 2016 Directors’ Remuneration Report;
•
reviewing performance under the 2016 AIP and consideration of any
bonuses payable;
• approving the 2017 AIP performance targets;
• approving the 2017 LTIP awards and performance targets;
•
•
reviewing performance against LTIP awards;
receiving executive remuneration advice from advisers in respect of a range
of matters considered by the Remuneration Committee during the year;
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
REMUNERATION POLICY REPORT
Introduction
This part of the Directors’ Remuneration Report sets out the Company’s policy
for the remuneration of its Directors.
The Directors’ Remuneration Policy was approved by shareholders at the
annual general meeting which took place on 3 May 2017 and took effect
from that date (replacing the previous policy). Since then, the Remuneration
Committee has reviewed the Directors’ Remuneration Policy and concluded
that it remained appropriate for the foreseeable future. Given there were
no proposals to revise the policy it remains valid and will not be put for
shareholder approval at the AGM. It is expected that the Company will next
propose a resolution to approve the directors’ remuneration policy at the
annual general meeting to be held in 2020, or sooner in the event of proposed
revisions to the policy.
The Directors’ Remuneration Policy is extracted in full without amendment
and it is in the form approved by the shareholders at the annual general
meeting which took place on 3 May 2017, except for this introduction and
minor amendments such as page or cross references, changed defined terms
and to remove comparisons with the 2014 policy.
Remuneration Principles for Senior Executives
The Directors’ Remuneration Policy is underpinned by the following
remuneration principles:
• Support long-term success of the business and sustainable long-term
shareholder value.
• Be aligned to the business strategy and achievement of planned business
goals.
• Be compatible with the Group’s risk policies and systems.
•
Link maximum payout to outstanding results.
• Ensure that performance-related pay constitutes a significant proportion
of the overall package.
• Provide a balance between attracting, retaining and motivating the right
calibre of candidates, and taking into account the entrepreneurial culture
of the business.
• Encourage a high performance culture.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Link with Strategy
The key objective to be achieved through the Directors’ Remuneration Policy is to support the Group’s main strategic objectives of expansion and high growth.
The AIP, the LTIP and the GIP contain specific performance measures designed to support the objectives of accelerating retail business performance in the
short and medium-term (for example, EBITDA A and Gross Sales A (Retail) targets) and the objectives of creating long-term success and sustainable long-term
shareholder value (for example, key strategic targets concerning the efficiency of the nascent solutions business).
The Directors’ Remuneration Policy, outlined on the following pages, provides the detailed structure of each element of remuneration and how each element is
determined. The remuneration package of the Executive Directors is made up of elements of fixed and variable remuneration. The Remuneration Committee is
mindful of the weighting of fixed and variable pay and balance of short- and long-term awards, and sought to position a larger proportion of the remuneration
package as equity-based and performance-related in order to support the Company’s strategic objectives of high growth and expansion and to create shareholder
alignment. The balance of the remuneration of the Executive Directors is set out at “Illustration of Directors’ Remuneration Policy” on pages 89 and 90. The holding
period in the LTIP, the share deferral provision in the AIP, the minimum shareholding requirements and the GIP’s five-year performance period all help ensure a
longer term focus for the business from the Executive Directors.
Base
Salary
Reflects the value of the individual, their role, skills, experience
(taking into account appropriate market data) and contribution to
the business
Fixed
Benefits
Aligned with all other employee arrangements
Pension
Provides an appropriate level of retirement benefits
Annual
Incentive
Plan
Deferred
Bonus
Under AIP
Long-Term
Incentives
One-Off
Plans
Incentivises achievement of annual objectives
Aligns Director and shareholder interests by delivering
bonus payments in deferred shares
Incentivises generation of long-term shareholder value
Motivates key individuals to achieve specific long-term
targets and exceptional levels of performance
Variable
A
See Alternative Performance
Measures on page 196
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
Remuneration Committee Discretion and Judgement
In formulating the Directors’ Remuneration Policy, the Remuneration Committee sought to allow it sufficient operational flexibility over Director remuneration
for three years. While the policy provides the boundaries for remuneration arrangements, the policy is intended to provide some isolated discretion for the
Remuneration Committee to use in various circumstances relating to particular components of remuneration. The Directors’ Remuneration Policy does not
provide for the exercise of discretion over any aspect of the policy. The Remuneration Committee may not use any discretion outside the policy without separate
shareholder approval.
The Remuneration Committee operates the share schemes according to their respective rules and in accordance with the Listing Rules and other rules and
regulations, where relevant. The Remuneration Committee retains discretion, in a number of regards, to the operation and administration of these plans. The
discretions include, but are not limited to, those set out in the table below.
Area of Discretion
AIP
LTIP
JSOS
GIP
The participants
The timing of grant of an award or payment
The size of an award (up to a predetermined maximum)
The determination of vesting, holding periods or payment
Discretion required when dealing with a change of control or restructuring of the Group
Determination of the treatment of leavers based on the rules of the plan and the
appropriate treatment chosen
Adjustments required in certain circumstances (for example, rights
issues, corporate restructuring events and dividends)
Adjust or change the performance conditions if anything happens which causes the
Remuneration Committee reasonably to consider it appropriate (for example, Board
approved strategic initiative or transaction) provided that any changed performance
condition will be equally difficult to satisfy as the original condition would have been
had such circumstances not arisen
The annual review of performance measures and weighting, and targets from year to year
Adjustment to level of payments or formulaic scheme outcomes, both upwards
and downwards, including to ensure the scheme outcomes reflect individual or
Company performance over the performance period, or to take account of unforeseen
circumstances outside the Company’s control
Application of malus and clawback
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
N
Y
Y
Y
N
Y
N
N
Y
Y
Y
Y
Y
Y
Y
Y
N
N
Y
The use of discretion in relation to the Company’s ESOS, Sharesave and Share Incentive Plan will be as permitted under HMRC rules and the other relevant rules
and regulations.
Any use of the above discretions would, where relevant, be explained in the Directors’ Remuneration Report and may, as appropriate, be the subject of
consultation with the Company’s major shareholders.
The Remuneration Committee may also apply judgement or a qualitative assessment, for example in assessing achievement against role specific objectives under
the AIP.
Development of Directors’ Remuneration Policy
Shareholder Context
The Remuneration Committee did not formally consult shareholders on the Directors’ Remuneration Policy on the basis that the minor changes to the policy were
to the benefit of shareholders (such as introducing an LTIP holding period) and there were no changes to the overall structure or elements of remuneration for the
Directors. Shareholders were notified of, and given the opportunity to discuss, the changes to the policy with the Chairman of the Remuneration Committee. The
Remuneration Committee had previously consulted shareholders on various incentive arrangements and the current policies and had used these consultations to
inform its view that there is good alignment between the Directors’ Remuneration Policy and shareholder interests.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Employee Context
The Remuneration Committee receives an annual report from management on Group-wide remuneration. This review covers changes to pay, benefits, pension
and share schemes for all employees in the Group, including the percentage increases in base pay for monthly and hourly paid employees. The Remuneration
Committee’s work includes monitoring and commenting on the level and structure of remuneration for the Management Committee in relation to various changes
to base pay and incentive plans. This provides some of the context for the Remuneration Committee’s decisions concerning changes to base pay and other
elements of remuneration for the Executive Directors.
However, the Remuneration Committee did not consult with employees when drawing up the Directors’ Remuneration Policy, nor take into account any
remuneration comparison measurements.
The Directors’ Remuneration Policy is designed in line with the remuneration principles outlined on page 74, which reflect the remuneration principles for the
Group. A key remuneration principle for the Group is that share awards be used to recognise and reward good performance and attract and retain employees.
This is reflected by the issue of awards of free shares and options to all employees under the SIP and the ESOS schemes, which allows all employees an
opportunity to share in the Group’s success via share ownership.
The remuneration arrangements for employees below Board level reflect the seniority of the role. The components and levels of remuneration for different
employees differ from the remuneration framework for the Executive Directors. The Group operates some tailored bonus and long-term incentive arrangements
for certain groups of employees, but has not adopted a universal approach to these elements of remuneration for all employees.
Remuneration Policy Table: Elements of Director Remuneration
The following table sets out the key elements of remuneration for the Executive Directors, their purposes and links to strategy, the maximum opportunity and any
performance conditions.
Purpose and Link
to Strategy
Fixed pay
Base pay
To attract and retain the
right calibre of senior
executive required to
support the long-term
interests of the business.
Recovery or
Withholding
No contractual
provisions for
clawback or malus.
How it Operates
Performance Conditions
Maximum Opportunity
Paid monthly in cash.
Not performance linked.
Reviewed annually by the Remuneration
Committee, with any changes normally
becoming effective in April each year (or
may be reviewed ad hoc where there is a
significant change of responsibilities).
The review takes into account a number
of factors including: the Group’s annual
review process, business performance,
total remuneration, appropriate market
data for comparable roles for companies
of equivalent size and complexity in
similar sectors and geographical locations
to the Company, and an individual’s
contribution to the Group.
To avoid setting the
expectations of Executive
Directors and other employees,
no maximum salary is set
under the policy. Normally,
maximum salary increases
for Executive Directors will be
within the normal percentage
range and guidelines that
are applied to the UK-based
monthly paid employees of the
Company in that year.
Where appropriate and
necessary, larger increases
may be awarded in exceptional
circumstances; for example, if a
role has increased significantly
in scope or complexity.
Larger increases may also
be considered appropriate
and necessary to bring a
recently appointed executive
in line with the market and
the other executives in the
Company where their salary
at appointment has been
positioned below the market.
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Remuneration Report
How it Operates
Performance Conditions
Maximum Opportunity
Purpose and Link
to Strategy
Benefits
To attract and retain the
right calibre of senior
executive required to
support the long-term
interests of the business.
Not performance linked.
The Company provides a range of benefits
which are aligned with those provided
to monthly paid employees under the
Company’s flexible benefits policy. These
may include: private medical insurance
and health assessments, life assurance,
travel insurance, income protection, travel
allowance, free parking, access to financial
and legal advice, staff product discount,
subsidised staff restaurants and other
discounts. Any business travel costs will be
paid by the Company. Additional benefits
or payments in lieu of benefits may also
be provided in certain circumstances, if
required for business needs.
Any benefits allowances will be paid in
cash monthly and will not form part of
pensionable salary.
The Company provides Directors’ and
Officers’ Liability Insurance and may
provide an indemnity to the fullest extent
permitted by the Companies Act.
Pension
To attract and retain
the right calibre of
senior executive
required to support
the long-term interests of
the business.
Contributions, allowances and pension
choices for the Executive Directors are on
the same terms as for other employees.
Executive Directors can choose to
participate in the defined contribution
Group personal pension scheme or an
occupational money purchase scheme.
Not performance linked.
Where lifetime or annual pension
allowances have been met, the balance of
employer contributions may be paid as a
cash allowance or into a personal pension
arrangement. These amounts will not
be treated as salary for the purposes of
incentive awards.
The Group’s contributions under the
defined contribution scheme are set as
a percentage of salary based on length
of scheme membership. Contributions
under the occupational money purchase
scheme are aligned with the legislative
minimum.
Recovery or
Withholding
No contractual
provisions for
clawback or malus.
No contractual
provisions for
clawback or malus.
Benefits for Executive
Directors are set at a level
which the Remuneration
Committee considers to be
appropriate against market
data for comparable roles
for companies of equivalent
size and complexity in similar
sectors and geographical
locations to the Company.
The maximum value of the
Directors’ and Officers’ Liability
Insurance and the Company’s
indemnity is the cost at the
relevant time.
Contributions to the
defined contribution pension
scheme for the Executive
Directors will normally be in
line with the other scheme
participants; however, the
Remuneration Committee
may exceed this standard
maximum in order to be market
competitive and attract and
retain the right calibre of senior
executive talent needed to
support the long-term interests
of the business.
Pension contributions for UK
based Executive Directors will
not exceed 30% of annual base
salary.
For Executive Directors outside
the UK, provision for an executive
pension will be set taking into
account local market rates.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Purpose and Link
to Strategy
How it Operates
Performance Conditions
Maximum Opportunity
Variable Pay: Short-Term Incentives
The maximum bonus is 200%
of base salary.
The maximum bonus payable
for the relevant financial year is
described in the Annual Report
on Remuneration.
Annual Incentive Plan
(“AIP”)
To provide a direct link
between measurable
and predictable annual
Company and/or role
specific performance
and reward.
To incentivise the
achievement of
outstanding results
aligned to the business
strategy.
Measures and targets are set annually and
bonus payments are determined by the
Remuneration Committee following the
year end based on performance against
the targets.
The Remuneration Committee
sets annual targets that are
closely aligned to the delivery
of the Group’s strategic
objectives for that year.
Bonus payments, if made, are payable in
cash after the results of the Group have
been audited.
To the extent that an Executive Director
does not meet the minimum shareholding
requirement, up to 50% of any bonus
payment will be deferred into shares,
vesting after a period of three years.
These will be a mix of financial
targets and individual
objectives with the majority
being financial.
For threshold performance
no more than 25% of the
maximum opportunity
will be earned. For stretch
performance, the maximum
opportunity will be earned.
The performance conditions
for the relevant financial year
are described in the Annual
Report on Remuneration.
Recovery or
Withholding
Clawback may
apply for three
years (or longer if
the Remuneration
Committee
determines) from
date of payment of
a bonus or grant of
a deferred award, in
certain exceptional
circumstances.
Read more on
page 87.
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
Purpose and Link
to Strategy
How it Operates
Performance Conditions
Maximum Opportunity
Variable Pay: Long-Term Incentives
Long Term Incentive
Plan (“LTIP”)
To attract, retain and
incentivise senior
executives over the
longer-term.
To align the interests of
the senior executives and
the shareholders.
An award over a fixed number of
shares is granted annually. Awards
made in the form of nil-cost options or
conditional share awards will ordinarily
vest three years from award, subject to
continued service and the achievement
of performance conditions and other
conditions.
Dividend equivalents may be paid in
cash or additional shares on LTIP awards
that vest.
Awards made after 3 May 2017 are subject
to an additional holding period of two
years (or longer if the Remuneration
Committee determines) from the third
anniversary of the date of grant. LTIP
awards are only acquired by an Executive
Director once the total period of five years
from the date of grant has elapsed. The
holding period usually applies regardless
of whether or not the Executive Director
remains an employee of the Group.
The Remuneration Committee
sets targets that are closely
aligned to the delivery of the
Group’s strategic objectives for
the performance period.
These will be a mix of financial
targets and individual
objectives with the majority
being financial.
The Remuneration Committee
may grant awards, with a
maximum total market value
of 150% of annual base salary
of a participant. In the case of
the Chief Executive Officer, the
maximum total market value
of an award is 200% of annual
base salary.
In exceptional circumstances,
the Remuneration Committee
may grant awards with a
maximum total market value of
300% of annual base salary of a
participant or, in the case of the
Chief Executive Officer, 400% of
annual base salary.
For threshold performance,
no more than 25% of the
maximum opportunity will
vest. For stretch performance,
the maximum opportunity will
vest. The measurement period
for performance conditions
will ordinarily comprise
at least three financial
years of the Company. The
performance conditions
for the relevant award are
described in the Annual
Report on Remuneration.
Recovery or
Withholding
Clawback and
malus provisions
may be applied
to LTIP awards in
certain exceptional
circumstances. The
clawback period
will be two years
(or longer, if the
Remuneration
Committee
determines) from the
end of the holding
period or the date the
awards are acquired.
Read more on
page 87.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Purpose and Link
to Strategy
How it Operates
Performance Conditions
Maximum Opportunity
Variable Pay: One-off Long-Term Incentives
Four million shares for the
Chief Executive Officer and one
million shares for each of the
Chief Financial Officer and the
Chief Operations Officer.
Awards to new participating
Executive Directors or other
senior employees will not
exceed the awards of existing
participants.
Recovery or
Withholding
Clawback and malus
provisions may be
applied to GIP awards
in certain exceptional
circumstances. The
clawback period
will be two years
(or longer if the
Remuneration
Committee
determines) from the
date of vesting.
Read more on
page 87.
The JSOS rules contain limits
which constrain the number
of interests that may be issued
under the JSOS.
No future awards will be made
to the Executive Directors
under the JSOS.
Certain leaver
provisions allow
the Company
to recover share
interests in certain
circumstances.
Read more on
page 87.
Growth Incentive Plan
(“GIP”)
To attract, retain and
incentivise senior
executives.
To align the interests
of senior executives
and shareholders, by
incentivising senior
executives to deliver
exceptional levels of
growth and return to the
shareholder over the
long-term.
A one-off award of options over shares in
the Company with a nil exercise price.
The Chief Executive Officer, the Chief
Financial Officer and the Chief Operations
Officer received an award. New Executive
Directors and other senior employees
may be invited to participate at a level
dependent on the point during the
performance period at which they were
appointed.
The Executive Directors must hold a level
of shares throughout the performance
period. For the Chief Executive Officer, this
shareholding must be at least one times
salary and for other Executive Directors,
this shareholding must be at least half
times salary.
Joint Share Ownership
Scheme (“JSOS”)
To attract, retain and
incentivise senior
executives.
To align the interests of
the senior executives
and the shareholders, by
driving share price growth
over four years.
A one-off arrangement established prior
to the Company’s listing on the London
Stock Exchange in 2010.
The participants and Estera Trust (Jersey)
Limited, the EBT Trustee, acquired
separate beneficial interests in ordinary
shares of the Company. The participant
may lose his interest in the shares.
Awards are subject to a single
performance condition to be
satisfied over the five years
from the date of grant.
The share price of the Company
is the sole performance
measure and its growth will be
assessed relative to the growth
of the FTSE 100 Share Index
over that period.
Performance will be assessed
based on the three month
average share price of the
Company and of the FTSE 100
Share Index at the beginning
and end of the performance
period. The performance
target is growth in the FTSE
100 Share Index plus:
• not more than 5% p.a.: 0%
of the award vests;
• 5% p.a.: 25% of the award
vests;
• 10% p.a.: 50% of the award
vests;
• 15% p.a.: 75% of the award
vests; and
• 20% p.a.: 100% of the
award vests.
Interests in shares vested
annually over a four-year
period. The participant
benefits from the increase in
value of the shares' interests
above a predetermined
market price for each tranche
(the “hurdle price”).
Awards under the JSOS will
have no value unless the
hurdle price is achieved.
Interests in the Company’s
shares were granted in
tranches, with a different
hurdle price for each tranche.
Read more on page 99.
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Remuneration Report
Purpose and Link
to Strategy
All-Employee Share Plans
Sharesave
To provide all employees,
including Executive
Directors, the opportunity
to voluntarily invest in
Company shares and be
aligned with the interests
of shareholders.
How it Operates
Performance Conditions
Maximum Opportunity
Recovery or
Withholding
Not performance linked.
Options are usually granted
at a discount to the market
price at the time of grant up to
the maximum discount under
HMRC limits.
The scheme rules
do not provide for
malus or clawback
provisions.
Employees are limited to
saving a maximum amount
under HMRC limits.
All employees are eligible to participate
in this all employee tax advantaged share
scheme. The Company grants options
over shares in the Company to employees,
including the Executive Directors.
To obtain an option an eligible individual
must agree to save a fixed monthly
amount for three or five years up to
the maximum monthly amount under
HMRC limits. The amount saved will
determine the number of shares over
which the option is granted. Options
may be exercised in a six month period
at the maturity of a three or five year
savings period, subject to continued
service.
Not performance linked.
Maximum opportunity for
awards and purchases are kept
in line with HMRC limits.
The scheme rules
do not provide for
malus or clawback
provisions.
Share Incentive Plan
(‘‘SIP’’)
To provide all employees,
including Executive
Directors, the opportunity
to receive and invest in
Company shares and be
aligned with the interests
of shareholders.
All employees are eligible to participate
in this all employee tax advantaged share
scheme. The SIP allows:
•
the Company to grant free shares to
all employees allocated on an equal
basis;
• all employees to buy partnership
shares monthly from their gross salary;
and
•
the Company may offer matching
shares to employees who purchase
partnership shares.
Dividend shares are also covered by the
SIP arrangements.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 How it Operates
Performance Conditions
Maximum Opportunity
Recovery or
Withholding
Purpose and Link
to Strategy
2014 Executive Share
Option Scheme
(‘‘2014 ESOS’’)
To provide all employees,
including Executive
Directors, the opportunity
to receive Company share
options and be aligned
with the interests of
shareholders.
All employees are eligible to participate
in this all employee tax advantaged share
scheme and the unapproved part of the
scheme.
The Company grants options over shares
in the Company to employees. Options
over shares vest on the third anniversary
of grant, subject to continued service
and satisfaction of any performance
conditions. If vested, the options may be
exercised at any time between the third
and tenth anniversaries of grant at the
executive’s discretion.
Options issued prior to May 2014 were
issued under the ESOS. Employees and
two Executive Directors retain options
under the ESOS. From May 2014 new
option awards are made under the 2014
ESOS. The terms of the ESOS largely
mirror those of the 2014 ESOS.
Executive Share
Option Scheme
(‘‘ESOS’’)
To provide all employees,
including Executive
Directors, the opportunity
to receive Company share
options and be aligned
with the interests of
shareholders.
If awards are made to the
Executive Directors, the
Remuneration Committee
may set targets. The
Remuneration Committee sets
targets that are closely aligned
to the delivery of the Group’s
strategic objectives for the
performance period. These
may be a mix of strategic
and financial targets with the
majority being financial.
For threshold performance
no more than 25% of the
maximum opportunity
would be earned. For stretch
performance, the maximum
opportunity will vest. The
measurement period for
performance conditions will
ordinarily comprise at least
three financial years of the
Company.
See 2014 ESOS.
There are currently no plans
to make awards to the existing
Executive Directors under this
scheme.
The scheme rules
do not provide for
malus or clawback
provisions.
Maximum opportunity for
awards will be in line with
HMRC limits for the tax
advantaged part of the scheme.
Maximum opportunity for
awards under the unapproved
part of the scheme is 300% of
annual base salary, except in
exceptional circumstances.
See 2014 ESOS.
There are currently no plans to
make awards to any employees
or the Executive Directors
under this scheme.
See 2014 ESOS.
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
The following table sets out the key elements of remuneration for the Non-Executive Directors.
Purpose and Link
to Strategy
Chairman Fee
To attract and retain
an individual with the
appropriate degree
of expertise and
experience.
Non-Executive
Director Fee
To attract and retain
expert people with the
appropriate degree of
expertise and
experience.
Recovery or
Withholding
No contractual
provisions for
clawback or malus.
No contractual
provisions for
clawback or malus.
How it Operates
Performance Conditions
Maximum Opportunity
The fee is paid monthly in cash.
Not performance linked.
Reviewed annually by the Remuneration
Committee, with any changes normally
becoming effective in April each year.
The review takes into account a number
of factors including: the Group’s annual
review process, business performance
and appropriate market data for
comparable roles for companies of
equivalent size and complexity in similar
sectors and geographical locations to the
Company.
The fee is paid monthly in cash.
Not performance linked.
Fee structure includes an annual base
fee for a Non-Executive Director and may
include additional fees for being the
Senior Independent Director or a Board
committee chair.
Reviewed annually by the Executive
Directors and the Chairman, with any
changes normally becoming effective in
April each year.
The review takes into account a number
of factors including: the Group’s annual
review process, business performance
and appropriate market data for
comparable roles for companies of
equivalent size and complexity in similar
sectors and geographical locations to the
Company.
The maximum aggregate
amount of basic fees payable
to all Directors shall not
exceed the £1 million limit set
in the Company’s Articles of
Association.
Normally, any increases will be
within the normal percentage
range and guidelines that
are applied to the UK-based
monthly paid employees of the
Company in that year.
The maximum aggregate
amount of basic fees payable
to all Directors shall not
exceed the £1 million limit set
in the Company’s Articles of
Association.
Normally, any increases will be
within the normal percentage
range and guidelines that
are applied to the UK-based
monthly paid employees of the
Company in that year.
Travel and expenses
To support the Directors
in the fulfilment of their
duties.
The Company may reimburse expenses
and travel costs reasonably incurred by
the Chairman and the Non-Executive
Directors in fulfilment of the Company’s
business, together with any taxes thereon.
Not performance linked.
The maximum reimbursement
is expenses reasonably
incurred, together with any
taxes thereon.
No contractual
provisions for
clawback or malus.
Other arrangements
Not applicable.
The Chairman and the Non-Executive
Directors are not usually eligible for
annual bonus, share incentive schemes,
pensions or other benefits with the
exception of the staff product discount
and free delivery offered to all employees.
The Company provides the Chairman and
the Non-Executive Directors with Directors’
and Officers’ Liability Insurance and may
provide an indemnity to the fullest extent
permitted by the Companies Act.
Not applicable.
The maximum staff product
discount is that offered to any
Group employees.
The maximum value of the
Directors’ and Officers’ Liability
Insurance and the Company’s
indemnity is the cost at the
relevant time.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Notes to the Policy Tables:
1. No other items in the nature of remuneration are provided by the Company to its Non-Executive Directors, save for the amounts paid to Robert Gorrie as
described on page 96.
2. Other than as described in the policy table, there are no components of the Executive Directors’ remuneration that are not subject to performance measures.
In the case of the Sharesave and SIP, these tax advantaged all-employee schemes are subject to rules constrained by legislation and so awards are made on
the same terms (not comprising performance conditions) to all employees including Executive Directors. Prior to the Company’s listing in 2010, some option
awards were made to the Executive Directors under the ESOS without performance conditions. Options were awarded under the ESOS to Duncan Tatton-
Brown on his appointment to the Board. Although awards will not usually be made to existing Executive Directors, the rules of the ESOS and 2014 ESOS allow
the Remuneration Committee to impose performance conditions on any awards made to a Director under each plan. Performance targets apply to the AIP,
LTIP and GIP.
a. AIP — the Remuneration Committee adjusts the design (including measures and weightings) of the AIP each year to incentivise the delivery of key business
objectives and individual performance for that financial year. Management proposes suitable metrics and levels of performance to form the threshold and
stretch levels of performance. Any individual objectives applicable for the AIP are linked to the Executive Director’s role and/or his business area(s) and
are in line with the Group’s strategy. The measurable objectives are agreed between the Executive Director and the Chief Executive Officer (or in the case
of the Chief Executive Officer, between him and the Chairman). The Remuneration Committee reviews the proposed targets to assess whether they are
appropriately aligned with the strategy and shareholders’ interests and whether the reward that would accrue to the Executive Director is appropriate in
the circumstances. Usually, full vesting will only occur where exceptional performance levels have been achieved and significant shareholder value created.
Details of the AIP performance measures are outlined in the Annual Report on Remuneration.
b. LTIP — the Remuneration Committee reviews the design of the LTIP each year to ensure that the performance conditions remain relevant to the Company’s
key strategic objectives over the performance period. The Remuneration Committee reviews the performance measures in light of the long-term strategic
plan and agrees the threshold and stretch conditions that must be achieved. Full vesting will only occur where exceptional performance levels have been
achieved and significant shareholder value created. Details of the LTIP performance measures are outlined in the Annual report on remuneration.
c. GIP — the GIP performance measure was designed to incentivise outstanding growth in value of the Group over the five-year performance period. The
performance measure requires the growth in the Company share price to be significantly more than the growth of the FTSE 100 Share Index over that
period. This helps to ensure alignment with shareholders, as full vesting will only occur where outstanding shareholder value is created.
3. The Directors’ Remuneration Policy contains formal components for short and long-term incentives with performance conditions attached. While the Group
has a policy of remunerating its employees through share scheme participation, it does not have formal remuneration arrangements for all employees akin
to all of the components of Directors’ remuneration. In the case of the Management Committee, they participate in an annual bonus plan and the long-
term incentive schemes, including the LTIP and the JSOS, with award levels set at lower percentages of salary than those of the Directors. The performance
conditions and most other terms of these schemes are the same as for the Executive Directors. The bonus plan for senior management does not include
provision for share deferral of a payment. The LTIP awards from 2017 for senior management do not include holding periods. In the case of some small groups
of senior employees, the Group operates some tailored bonus and long-term incentive arrangements (such as the JSOS, cash-based long-term incentive
scheme and management incentive plan). Aside from these targeted arrangements (and the SIP, the ESOS and the Sharesave), the variable remuneration of
employees is not closely aligned with that of Directors.
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DIRECTOR MINIMUM SHAREHOLDING EXPECTATION
It is the policy of the Company that the Directors are expected to build up over a period of time, and hold, a minimum level of shareholding in the Company. This is
considered an effective way to align the interests of the Executive Directors and the shareholders in the long-term. These shareholding expectations are outlined in
the table below.
Director
Executive Directors
Shareholding Expectation
Executive Directors are expected to hold shares equivalent to 200% of base salary. This holding can be built up over
five years from appointment.
Share awards may count if vesting is not subject to any further performance conditions or other conditions such as
continued employment. The net value of share interests and share awards which are vested, but remain subject to
a holding period and/or clawback, may count towards the shareholding requirement.
Until the minimum shareholding is met, an Executive Director must defer up to 50% of any cash bonus payable under
the AIP as an award of shares.
Chairman
The Chairman is expected to hold shares equivalent to one year’s annual fee. This holding can be built up over three
years from appointment.
Non-Executive Directors
Non-Executive Directors are expected to hold shares equivalent to one year’s annual fee. This holding can be built up
over three years from appointment.
Should the minimum shareholding expectation be met but the market
value of the Company’s shares subsequently fall below the required level,
compliance with this expectation will be based on the higher of the original
share purchase price (or the price at vesting in the case of share awards) or
current market price.
APPROACH TO REMUNERATION OF DIRECTORS ON RECRUITMENT
Recruitment of Executive Directors
When determining the remuneration of a newly appointed Executive Director,
the Remuneration Committee will apply a number of principles.
The Remuneration Committee will seek to align the remuneration package of
a newly appointed Executive Director with the Directors’ Remuneration Policy
outlined above. However, the Remuneration Committee retains the discretion
to include any other remuneration component or award in the remuneration
package which it considers to be appropriate.
In determining the remuneration arrangements for a new Executive Director,
the Remuneration Committee will take into account all relevant factors
including (but not limited to) the specific circumstances, the calibre of the
individual, the market practice for the candidate’s location, the nature of the
role they are being recruited to fulfil and any relevant market factors, including
any competing offers the candidate may be considering. The Remuneration
Committee is at all times conscious of the need to pay no more than is
necessary. The Remuneration Committee’s considerations would be subject to
the overall limit on variable remuneration outlined below.
Where promotion to an Executive Director role is from within the Company,
any performance-related pay element arising from their previous role will
continue on its original terms, provided such element (if not otherwise within
the terms of this policy) was not made in contemplation of such person
becoming an Executive Director.
To facilitate recruitment, the Remuneration Committee may, to the extent
permitted by relevant plan rules or Listing Rules, make a one-off award to
“buy out” incentives or any other compensation arrangements forfeited by
the appointee on leaving a previous employer. In doing so the Remuneration
Committee will ensure that any such awards offered should be on a
comparable basis, taking into account all relevant factors including any
performance conditions, the likelihood of those conditions being met, the
proportion of the vesting or performance period remaining and the form of the
award. In determining whether it is appropriate to use such judgement, the
Remuneration Committee will ensure that any awards made are in the best
interests of both the Company and its shareholders.
In addition, one-off payments in respect of relocation or ongoing relocation
allowances may be made to a newly appointed Executive Director. However,
these payments must reflect actual financial loss or cost of moving the
Executive Director, their family or assets, and the market practice in the
geographical location to which the Executive Director is moving to or from.
The Company may provide relocation costs by funding services or a cash
payment or a combination of both.
The maximum level of variable pay which may be awarded upon recruitment
(excluding any “buy out” awards or costs and allowances on relocation
and awards made to appointees under the GIP) is 600% of base salary. Any
GIP awards will be subject to the award limits set out in the remuneration
policy table.
Recruitment of Non-Executive Directors
The remuneration package for newly appointed Non-Executive Directors will
be in line with the structure set out in the remuneration policy table for Non-
Executive Directors.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 LOSS OF SERVICE OR TERMINATION POLICY
Service Contracts for Executive Directors
Each of the Executive Directors is employed pursuant to a service contract
with Ocado Central Services Limited.
The Directors’ Remuneration Policy provides that an Executive Director’s
employment may be terminated by the Company giving to the Executive
Director not less than 12 months’ notice or by the Executive Director giving to
the Company not less than six months’ notice.
The Directors’ Remuneration Policy provides that if an Executive Director’s
service contract is terminated without cause, Ocado Central Services Limited
can request that the Executive Director work their notice period, take a period
of garden leave or pay an amount in lieu of notice equal to one times their
basic salary, benefits and pension for the remainder of their notice period.
While the service contracts do not specify this, the Company’s remuneration
principles provide that any payments should be reduced in certain
circumstances where the Executive Director’s loss has been mitigated, for
example, where he moves to other employment.
The service contracts do not contain any specific provisions relating to a
change of control of the business.
If employment is terminated by the Company, the Remuneration Committee
retains a discretion to settle any other amounts reasonably payable to the
Executive Director including legal fees incurred by the Executive Director in
connection with the termination of employment and obtaining independent
legal advice on a settlement or compromise agreement, and the relocation
costs for returning the departing Executive Director and his family to their
original country of origin. The Company may provide relocation costs by
funding services, or cash payment or a combination of both.
Other than described above, there are no relevant contractual provisions that
are, or are proposed to be, contained in any Executive Director service contract
that could give rise to remuneration payments or payments for loss of office,
but which are not disclosed elsewhere in the Directors’ Remuneration Policy.
Letters of Appointment for Non-Executive Directors
Each of the Non-Executive Directors has a letter of appointment with the
Company. The Directors’ Remuneration Policy provides that a Non-Executive
Director’s appointment may be terminated by either party giving to the other
not less than one month’s notice, or in the case of the Chairman, not less than
six months’ notice.
Other than described above, there are no relevant contractual provisions that
are, or are proposed to be, contained in any Non-Executive Director’s letter
of appointment that could give rise to remuneration payments or payments
for loss of office, but which are not disclosed elsewhere in the Directors’
Remuneration Policy.
Payments on Cessation of Employment for Executive Directors
The Executive Director service contracts do not oblige the Company to pay
a bonus if the Executive Director is under notice of termination. But under
the rules of the AIP, the Executive Director may receive a proportion of the
bonus or deferred award that the Remuneration Committee determines
would otherwise have been payable or granted to him under the rules for the
financial year.
The treatment of outstanding share awards is governed by the relevant
scheme rules, all of which have been approved by shareholders. The table on
page 88 provides a summary of these leaver provisions. The Remuneration
Committee generally has discretion to determine the treatment of a leaver, but
will be conscious of the remuneration principle that it should not reward poor
performance or behaviour.
Payments on Cessation of Service for Non-Executive Directors
A Non-Executive Director is not entitled to any other payment on cessation of
service with the Company.
MALUS AND CLAWBACK PROVISIONS
The AIP, LTIP and GIP scheme rules contain malus and/or clawback provisions
that allow the Remuneration Committee to reduce or retrieve a payment or an
award. The Remuneration Committee will do so when there are exceptional
circumstances. Such exceptional circumstances include (without limitation)
a material mis-statement in the published results of the Group, an error in
assessing any applicable performance condition, misconduct on the part of
the Executive Director concerned and where, as a result of an appropriate
review of accountability, the Remuneration Committee determines that the
Executive Director has caused wholly or in part a material loss for the Group as
a result of (i) reckless, negligent or wilful actions or (ii) inappropriate values or
behaviour.
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SHARE SCHEME LEAVER PROVISIONS
The incentive schemes contain leaver provisions that cover arrangements for awards where a participant leaves employment with the Group, as set out in the
relevant scheme rules and summarised below.
Remuneration
Element
LTIP
GIP
JSOS
Bad Leavers
Good Leavers
If a participant ceases to be an employee of the Group for a good leaver reason (e.g. ill health, injury
or permanent disability), then his LTIP awards which have not vested will vest on the vesting date (or
earlier as the Remuneration Committee shall determine) but only to the extent that the performance
conditions have been satisfied subject to operation of malus and clawback provisions. Unless the
Remuneration Committee decides otherwise, the LTIP award will be reduced pro rata to reflect the
proportion of the performance period that has elapsed to the date of cessation of employment. The
LTIP awards will normally continue to be subject to the post-vesting holding period.
If a participant dies, his LTIP awards will vest on the date of his death and the performance
conditions will not apply but (unless the Remuneration Committee decides otherwise) the LTIP
award will be reduced pro rata to reflect the proportion of the performance period that has elapsed
at the date of death. The post-vesting holding period will not apply to his LTIP awards.
To the extent that LTIP options vest in accordance with the above provisions, they may usually be
exercised for a period of 12 months following vesting (or such longer period as the Remuneration
Committee may decide) and will otherwise lapse at the end of that period.
To the extent that a participant who leaves in circumstances other than dismissal for cause or who dies
holding vested LTIP options, they may be exercised at any time during the usual exercise period and will
otherwise lapse at the end of that period. The post-vesting holding period will continue to apply (except
in the event of a participant’s death) unless the Remuneration Committee decides otherwise.
The Company may apply the post-vesting holding period to an LTIP award or to any part of it in one
of two ways: (i) to vested awards where the underlying shares are retained by the Company for the
duration of the holding period and are only transferred to participants on expiry of such period; or (ii)
to vested awards where the underlying shares are transferred to the participant on vesting but which
remain subject to additional restrictions (such as transfer or sale) until expiry of the holding period.
See LTIP above, as the same leaver rules apply (except with respect to holding periods which do not
apply to GIP awards).
The participant’s interest shall continue to vest on the same dates as if that participant had
remained in employment so long as the participant remains a good leaver.
Should the participant die before a tranche vests, the participant’s interest will vest entirely on the
date of death.
Generally, unvested LTIP awards
(and vested LTIP options) will lapse
on the date the participant ceases
to be an employee.
See LTIP above, as the same leaver
rules apply (except with respect to
holding periods which do not apply
to GIP awards).
If a participant is a ‘‘bad leaver’’ (i.e.
he is neither a ‘‘good leaver’’ nor a
‘‘very bad leaver’’), he would retain
his vested interests on ceasing to be
an employee, but unvested interests
may be acquired by the EBT Trustee
for the lower of the market value and
the initial subscription price.
In the case of a “very bad leaver” (i.e.
has or could have been dismissed for
cause or is in material breach of an
obligation binding after termination),
both vested and unvested interests
may be acquired by the EBT Trustee
for the lower of the market value and
the initial subscription price.
Deferred Shares
Under the AIP
Deferred share awards will lapse
on the date the Executive Director
ceases to be an employee.
An Executive Director will retain his deferred share award on ceasing employment with the Group
and will receive the award at the usual vesting date in accordance with the plan rules, subject to the
operation of clawback and malus provisions.
All-Employee Share
Plans
Leavers will be treated within the
scheme rules.
Leavers will be treated within the scheme rules.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CHANGE OF CONTROL
The incentive schemes contain change of control provisions, as set out in the
relevant scheme rules.
Under the LTIP, in the event of a takeover of the Company, LTIP awards will
vest early subject to: (i) the extent that the performance and other conditions
have been satisfied at that time, (ii) the operation of malus or clawback,
and (iii) (unless the Remuneration Committee decides that pro-rating would
be inappropriate in the particular circumstances) pro-rating to reflect the
proportion of the normal performance period that has elapsed at the date of
that event. The Remuneration Committee may, in its discretion, determine
that the post-vesting holding period will no longer apply to an LTIP Award or
to any part of it as of the vesting date or on such later date as decided by the
Remuneration Committee.
Under the GIP, if there is a change of control of the Company, options may
be exercised early subject to the performance target being satisfied, and in
proportion to the amount of the performance period that has elapsed.
Under the AIP, deferred share awards vest early on a change of control, though
the Remuneration Committee has discretion to not release the award early
and instead roll the award into an equivalent award in the acquiring company.
Under the terms of the JSOS rules, in the event of an offer a participant may
request the EBT Trustee to accept the offer with respect to shares that have
vested under the JSOS.
Read more about agreements impacted by a change of control in the
Directors’ Report on pages 113 to 114.
OTHER REMUNERATION
External Appointments for Executive Directors
It is the Company’s policy and a requirement of the contract of employment
that the Executive Director may not take up non-executive directorships
or other appointments without the approval of the Board. Any outside
appointments are considered by the Nomination Committee or the Board to
ensure they would not cause a conflict of interest and are then approved by
the Board. The Board would not usually agree to an Executive Director taking
on more than one non-executive directorship of a listed or public company
or the chairmanship of such a company. It is the Company’s policy that
remuneration earned from such appointments may be kept by the individual
Executive Director.
Payments Which are not in Accordance with the Policy
The Remuneration Committee reserves the right to make any remuneration
payments and payments for loss of office (including exercising any discretions
available to it in connection with such payments) notwithstanding that they
are not in line with the policy set out above where the terms of the payment
were agreed: (i) before 7 May 2014 (the date the Company’s first shareholder-
approved directors’ remuneration policy came into effect; (ii) before the
policy set out above came into effect, provided that the terms of the payment
were consistent with the shareholder-approved Directors’ remuneration
policy in force at the time they were agreed; or (iii) at a time when the
relevant individual was not a Director of the Company and, in the opinion
of the Remuneration Committee, the payment was not in consideration
for the individual becoming a Director of the Company. For these purposes
“payments” includes the Remuneration Committee satisfying awards of
variable remuneration and, in relation to an award over shares, the terms of
the payment are “agreed” at the time the award is granted.
Minor Amendments
The Remuneration Committee may make minor changes to this policy
for regulatory, exchange control, tax or administrative purposes or to take
account of a change in legislation without seeking shareholder approval for
that amendment.
ILLUSTRATION OF DIRECTORS’ REMUNERATION POLICY
The bar charts on page 90 provide estimates of the potential future reward opportunity for each of the Executive Directors based on the Directors’ Remuneration
Policy outlined on pages 74 to 90.
AIP
LTIP
GIP
Minimum
Performance is below threshold on
each metric.
Performance is below threshold on
each metric.
Performance is growth in the FTSE
100 Share Index plus not more than
5% p.a.
Target or at
Expectation
Performance is in line with the
Company’s expectations.
Threshold performance is reached.
Performance is growth in the FTSE
100 Share Index plus 5% p.a.
Maximum
Maximum performance is achieved
on each metric.
Maximum performance is achieved
on each metric.
Performance is growth in the FTSE
100 Share Index plus 20% p.a.
Base Salary, Benefits
and Pension
Fixed
Fixed
Fixed
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Remuneration Report
The figures use the 2016 base salary and pension (see pages 98 and 99 of the 2016 annual report) and value of benefits received for 2016 (see page 99 of the 2016
annual report). The performance related pay figures are based on the potential awards for 2017 (see pages 99 to 100 of the 2016 annual report), but it should
be noted that LTIP awards granted in a year do not normally vest until the third anniversary of the date of grant. For the purposes of illustrating the Directors’
Remuneration Policy, it is assumed that the LTIP awards granted in 2017 will also be vesting in 2017. The estimated value of the GIP is calculated using a share
price of 281 pence per share, being the average share price of the final three months of the 2016 reporting period. It is also assumed that the GIP will vest in 2019.
The estimated remuneration for each Executive Director is based on three different levels of performance, set out below.
In all scenarios, the impact of share price movements on the value of the LTIP awards has been excluded.
TIM STEINER, CHIEF EXECUTIVE OFFICER (£m)
Minimum
93%
7%
Target
14%
11% 7% 67%
1%
Maximum
4%
5%
9%
81%
1%
0
2
4
6
8
10
12
14
Salary and benefits
Pension
AIP
LTIP
GIP
DUNCAN TATTON-BROWN, CHIEF FINANCIAL OFFICER (£m)
Minimum
93%
7%
Target
25%
16% 9% 48%
2%
Maximum
9%
9%
13%
68%
1%
0
0.5
1
1.5
2
2.5
3
3.5
4
Salary and benefits
Pension
AIP
LTIP
GIP
NEILL ABRAMS, GROUP GENERAL COUNSEL AND COMPANY SECRETARY (£m)
Minimum
93%
Target
50%
Maximum
30%
7%
31%
4%
30%
3%
15%
37%
0
0.2
0.4
0.6
0.8
1
1.2
Salary and benefits
Pension
AIP
LTIP
MARK RICHARDSON, CHIEF OPERATIONS OFFICER (£m)
Minimum
93%
7%
Target
25%
16% 9% 48%
2%
Maximum
9%
9%
13%
68%
1%
0
0.5
1
1.5
2
2.5
3
3.5
4
Salary and benefits
Pension
AIP
LTIP
GIP
90
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 ANNUAL REPORT ON REMUNERATION — 2017
Introduction
This part of the Directors’ Remuneration Report sets out the Directors’ remuneration paid in respect of the 2017 financial year. It sets out the payments to
Directors and details of the link between Company performance and remuneration of the Chief Executive Officer. This part, together with the “Description of the
Remuneration Committee” section on pages 72 and 73 constitutes the Annual Report on Remuneration, and will be put to an advisory shareholder vote at the
Company’s AGM.
Highlights for 2017 (audited)
This table briefly summarises the highlights of the Directors’ remuneration arrangements for the financial year.
Base Pay and Benefits
Pension
AIP
Long-Term Incentives
All-Employee Schemes
Base pay increase of 2.75% for
the Executive Directors, in line
with other employees.
Non-Executive Directors fees
were not changed in the period.
No change to taxable benefits.
Company contributions
to pensions for Executive
Directors, which are currently
significantly below the
maximum provided for under
the 2017 Policy, did not
change during the period.
Total bonus earned by
Executive Directors for 2017
based on achievement of
41.5% to 42% of performance
target, was £745,282 (2016:
£759,953).
Awards were granted under
the LTIP.
Ongoing participation in the
SIP and Sharesave schemes.
For the 2015 LTIP awards,
which are due to vest in
March 2018, achievement
was 25%.
Sharesave options lapsed
during the period.
Read more on page 92.
Read more on page 93.
Read more on page 93.
Read more on page 95.
Read more on pages 95 to 96.
TOTAL DIRECTOR REMUNERATION (AUDITED)
The total remuneration paid to all of the Directors during the period was £3,531,000. The detailed remuneration breakdown for the Executive Directors and the
Non-Executive Directors is set out separately.
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EXECUTIVE DIRECTORS
Total Remuneration (audited)
The total remuneration for the period for each of the Executive Directors is set out in the table below. Total cash-based remuneration paid to the Executive
Directors was £2,488,000 in 2017, which was 0.6% higher than in 2016 (£2,472,000).
Tim Steiner
Neill Abrams
Duncan Tatton-
Brown
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Mark Richardson
2016
2017
£’000
£’000
589
4
47
640
310
950
—
210
—
—
—
4
—
214
—
1,164
572
2
46
620
315
935
—
186
—
—
—
—
—
186
—
1,121
305
1
30
336
129
465
—
65
—
—
—
3
—
68
—
533
297
1
26
324
132
456
—
68
—
—
—
—
—
68
—
524
364
1
26
391
153
544
—
97
—
—
—
3
—
100
—
644
354
1
28
383
156
539
—
102
—
—
—
—
—
102
—
641
364
1
12
377
152
529
—
97
—
—
—
3
—
100
—
629
354
1
31
386
156
542
—
102
—
—
—
—
—
102
—
644
Total
2017
£’000
1,622
7
115
1,744
744
2016
£’000
1,577
5
131
1,713
759
2,488
2,472
—
469
—
—
—
13
—
482
—
2,970
—
458
—
—
—
—
—
458
—
2,930
Salary
Taxable Benefits
Pensions
Total Fixed Pay
AIP
Total Remuneration
in cash
Share Plans
JSOS
LTIP
GIP
ESOS
2014 ESOS
SIP
Sharesave
Total for Share Plans
Recovery of Sums Paid
Total Remuneration
1. The value of LTIP awards for 2014 included in the column for the 2016 financial year has been restated to show the actual vested amount (based on the vesting of the award on
31 March 2017 at a price of 249.007 pence per share). The actual vested amount is £48,500 lower than the estimated vested amount stated in the 2016 annual report of £507,000. The
estimated vested amount was based on the three-month average share price from 1 September 2016 to 27 November 2016 of 275.42 pence per share. No dividends were paid.
2. The value of LTIP awards for 2015 included in the column for the Financial Year has been estimated based on 25% vesting and the three-month average share price from 1 September
2017 to 3 December 2017 of 288.239 pence per share, as these awards are not capable of vesting until after the end of the period, on 22 March 2018. This value assumes no dividends
will be payable. The value assumes that the participant will not be required to pay an amount to acquire the conditional shares, being the nominal price of 2 pence per share. These
estimated figures will be restated in next year’s annual report.
3. A savings contract under the Sharesave scheme matured on 1 December 2016. A value of nil is shown in the table for this award, which is explained on page 95 of this report.
4. Under the Share Incentive Plan, awards of Free Shares and Matching Shares became unrestricted during the period. These awards are explained on page 102 of this report.
An explanation of each element of remuneration paid in the table is set out in the following section.
The Company has obtained a written confirmation from each Executive Director that they have not received any other items in the nature of remuneration from
the Group, other than those already disclosed in this report.
Base Salary (audited)
During the period, the Remuneration Committee reviewed the salaries of the Executive Directors. After taking into account a number of relevant factors which are
discussed in more detail below, the Remuneration Committee recommended that all basic salaries be increased. The following table shows the change in each
Executive Director’s salary.
Director
Tim Steiner
Duncan Tatton-Brown
Mark Richardson
Neill Abrams
Salary 2017
(£)
Salary 2016
(£)
594,000
367,000
367,000
308,000
577,830
357,204
357,204
300,000
Effective from
1 April 2017
1 April 2017
1 April 2017
1 April 2017
The changes to base salary were made in line with the Directors’ Remuneration Policy. The Executive Directors received an increase in base pay of 2.75% (rounded
accordingly) which was in line with the percentage salary increases for the monthly paid employees of the Group in the period. The increases, which position the
salaries broadly around the market median for a company of the Company’s size and complexity, also aim to help retain the Executive Directors.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Taxable Benefits (audited)
The Executive Directors received taxable benefits during the period, notably private medical insurance and travel insurance. The Executive Directors also received
other benefits, which are not taxable, including income protection insurance, life assurance and Group-wide employee benefits, such as an employee discount.
The remuneration arrangements for the Executive Directors do not include a Company car or car cash allowance, but the Executive Directors have access to a
chauffeur to drive a car for the purposes of attending business meetings. Non-business use of the chauffeur is tracked and is shown as a taxable benefit in the
total remuneration table to the extent it was used for that purpose. These benefits arrangements were made in line with the Directors’ Remuneration Policy which
allows the Company to provide a broad range of employee benefits.
Pensions (audited)
The Company made pension contributions on behalf of the Executive Directors to the defined contribution Group personal pension scheme. The employer
contributions to the pension scheme in respect of each Executive Director are made in line with the Group personal pension scheme for all employees (the
Company contributions being, for employees and Executive Directors joining the pension scheme before May 2013, from 3% up to 8%, for employees joining
the scheme after May 2013, from 3% up to 6%, depending on the number of years the employee or Executive Director has participated in the scheme and for
employees and Executive Directors joining the scheme after October 2017 up to 7%). The contributions during the period made on behalf of the Executive
Directors were 8% of base salary. These contributions were made in line with the Directors’ Remuneration Policy which allows the Company to make employer
contributions of up to 30% of base salary.
Pension contributions can be made to the Executive Directors (and any other employee) as a cash allowance where the Executive Director (or employee) has
reached either the HMRC annual tax free limit or HMRC lifetime allowance limit for pension contributions as provided for in the Directors’ Remuneration Policy. In
accordance with this policy, Tim Steiner, Mark Richardson and Neill Abrams have elected to receive their part of their pension contributions as an equivalent cash
allowance. Duncan Tatton-Brown has elected to receive all of his pension contribution as cash in line with the Company policy.
Annual Incentive Plan (audited)
The Remuneration Committee re-examines the design of the AIP each year to incentivise the delivery of key business objectives and individual performance
for that financial year. The 2017 AIP was based on the performance targets and weightings set out below. Financial performance measures, namely Gross
Sales A (Retail) and EBITDA A for the Group, were the primary targets, with 70% of the annual bonus being determined by performance against targets set by
the Remuneration Committee at the start of the financial year, by reference to the Company’s budget for the period. Of the balance, 30% related to individual
objectives for each of the Directors, largely independent of the financial objectives. The Remuneration Committee has agreed “threshold” and “maximum”
conditions that must be achieved. A bonus is not payable unless a “threshold” level of the performance condition has been achieved. At “threshold” performance
for a financial performance measure, 8.75% of total bonus is payable and at “maximum” performance, 35% of total bonus is payable. A straight-line sliding scale
will apply in relation to the intermediate points between the “threshold” and “maximum”. Each target was discrete and could be earned separately. The Chief
Executive Officer had a maximum bonus opportunity of 125% of salary and the other Executive Directors had a maximum opportunity of 100% of salary.
Tim Steiner
Duncan Tatton-Brown
Mark Richardson
Neill Abrams
Financial objectives
EBITDA A (% of total target)
Gross Sales A (Retail) (% of total target)
Individual objectives
(% of total target)
Examples of business area objectives
35
35
35
35
35
35
35
35
1.
2.
30
Deliver/progress key
projects including new
CFCs and technology
Increase business
development capability
in Ocado Solutions
30
Drive sufficient cost
challenge for operational
programmes
Prepare and execute a
financing strategy for
future growth
30
Increase capacity at
Andover CFC
Launch Morrisons
store pick
30
Support all Ocado
Solutions contractual
negotiations
Ensure head office
functions continue to
service changing
business needs
A
See Alternative Performance
Measures on page 196
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93
Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
Financial Targets and Individual Targets
Each Executive Director had five to six individual objectives, with different weightings, under the plan. They related to specific programmes relevant to each
Executive Director’s business area for which they have primary responsibility. All of the Executive Directors had an individual objective which concerned the
strategic plans for the Ocado Solutions business. The Remuneration Committee also considered environmental, social and governance issues when setting the
individual objectives. The Remuneration Committee reviewed the performance of each Executive Director against the measurable performance metrics and based
their judgement on a scoring report by the Chief Executive Officer and the Chairman.
The Group’s Gross Sales A (Retail) were £1,429.1 million for 52 weeks, which was above the ‘‘threshold” of £1,400 million set under the 2017 AIP. The Group’s EBITDA A
(pre-exceptional items) for 52 weeks was £84.3 million, which was below the “threshold” of £88 million set under the 2017 AIP.
The Remuneration Committee, in assessing performance, took into account the level of the Group’s trading performance compared with UK grocery retail peers
and the Group’s progress against its strategic objectives. All Executive Directors met to some extent their individual objectives, with achievement being scored
between 81% and 83% of maximum.
Financial Targets
Individual Objectives
Total Payment
Gross Sales A (Retail)
Group EBITDA A
Target
Performance
Achievement
Target
Performance
Achievement
Performance
Achievement
Threshold Maximum
Actual
% bonus
% salary
Threshold Maximum
Actual
% bonus
% salary
% bonus
% salary
% salary
£1,400m
£1,490m £1,429.1m
17.2%
21.5%
£88m
£96m
£84.3m
Director
Tim Steiner
Duncan Tatton-
Brown
£1,400m
£1,490m £1,429.1m
Neill Abrams
£1,400m
£1,490m £1,429.1m
Mark Richardson £1,400m
£1,490m £1,429.1m
17.2%
17.2%
17.2%
17.2%
17.2%
17.2%
£88m
£88m
£88m
£96m
£96m
£96m
£84.3m
£84.3m
£84.3m
0%
0%
0%
0%
0%
Note 1
24.6%
30.8%
52.3%
0%
0%
0%
Note 1
Note 1
Note 1
24.6%
24.8%
24.3%
24.6%
24.8%
24.3%
41.8%
42%
41.5%
£’000
£310
£153
£129
£152
1. There is no threshold or maximum target set for the individual objectives. Each objective is weighted and scored to provide a total score out of 30. Performance may range from
zero to 30.
2. The applicable salary used for calculating the bonus payment under the rules of the 2017 AIP is the applicable base salary on the date of payment.
Disclosure of Targets
The threshold and maximum targets and achievement against the targets have been disclosed in respect of the financial targets for the AIP. A broad description
of some of the Executive Directors’ individual objectives has been provided, but specific details concerning the individual objectives and performance against
them has not been disclosed in this report. Although the Remuneration Committee is conscious of the regulations and the Code requirement that performance
targets should be transparent, it considers that the individual objectives were and remain commercially sensitive to the Company and if disclosed could damage
the Company’s commercial interests. These individual objectives mostly relate to important business strategies and actions and consequently could hinder the
progress of the business or the Group’s competitive advantage if publicly disclosed. The Remuneration Committee does not expect to disclose this information at
a later date. The Remuneration Committee believes that the targets were stretching and have been rigorously applied.
Summary of Bonus Earned
The Remuneration Committee has, in accordance with the Directors’ Remuneration Policy and the rules of the 2017 AIP, recommended an aggregate bonus
payment under the plan for the period of £745,282 (2016: £759,953), based on achievement between 41.5% and 42% of maximum (2016: achievement of 43% to
44% of maximum). The Remuneration Committee believes that this level of bonus payment appropriately reflects the performance of the business and individual
performance during the period, which saw strong sales and customer growth and progress with strategic objectives, but which saw Group EBITDA A in line with
prior year due to increased costs. The table above summarises the bonus payments for each Executive Director for the 2017 AIP. The cash payments are expected
to be made in February 2018. No amount has been deferred to a later date given that under the rules of the AIP deferral does not apply as all of the Executive
Directors have met the minimum shareholding expectations under the Directors’ Remuneration Policy.
Long Term Incentives and Share Plans
Awards granted under long-term incentive plans and share plans only count towards the total remuneration figure for the period in which they vest or where
achievement of performance targets is determined in the period. Awards under most of the Company’s share plans are subject to three-year vesting periods and
therefore awards made or exercised during the period will not necessarily be reflected in the total remuneration figure for this period. Further details on all the
existing share incentives held by the Executive Directors are set out below.
A
See Alternative Performance
Measures on page 196
94
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 LTIP
The LTIP is the primary long-term incentive for the Executive Directors. The LTIP awards help reward the Executive Directors for the delivery of long-term business
objectives.
The three-year performance period for the 2015 LTIP awards expired at the end of the financial year. The Remuneration Committee reviewed the performance
against the four equally weighted performance conditions for the 2017 financial year. The four performance conditions for the 2015 LTIP awards were retail
Revenue A , adjusted retail EBT*, platform operational efficiency and platform capital efficiency.
Retail Revenue represented 25% of the award. As noted on page 32, the retail Revenue for the period was £1,317.4 million for 52 weeks, which was an increase of
12.4% on 2016 and an increase of 27.4% between 2015 and 2017, but which fell below the threshold of £1,330.0 million set under the LTIP award. The revenue used
as a performance criteria for the LTIP includes retail revenue generated by Ocado.com and the other retail sites – Fetch, Sizzle and Fabled – but excludes revenue
from Morrisons and the Solutions business. Consequently, achievement against this performance target was nil.
Adjusted retail EBT* for the period was £12.8 million, which fell below the threshold of £14.8 million set under the LTIP award. This measure is not consistent with
the segmental reporting changes made in 2017. The performance target for adjusted retail EBT* is based on Group EBT less an apportionment of certain costs in a
number of areas relating to the Solutions business and based on 52 weeks. Consequently, achievement against this performance target was nil.
Platform operational efficiency and platform capital efficiency represented 25% of the award each and achievement against each was 0% and 25% respectively.
Specific details of achievement against these targets has not been disclosed in this report, although overall achievement has been. The first concerns the
operational efficiency of the platform solution for the Financial Year and the second covers the capital cost for the platform. Although the Remuneration
Committee is conscious of the regulations and the Code requirement that performance targets should be transparent, it considers that disclosure of the
achievement against these specific targets remains commercially sensitive to the Company and if disclosed could damage the Company’s commercial interests.
The Remuneration Committee believes that the targets were stretching and have been applied vigorously.
Accordingly, the Remuneration Committee has, in accordance with the Directors’ Remuneration Policy and the rules of the LTIP, recommended overall vesting of
25% for the 2015 LTIP awards. The Remuneration Committee believes that this level of vesting appropriately reflects the performance of the business during the
performance period. Details of performance are set out in the table below.
The value of the 2015 LTIP awards in the total remuneration table is estimated based on the average Company share price for the final three months of the period,
being 288.239 pence per share.
The expected vesting date of the 2015 LTIP award is 22 March 2018. Subject to the continued satisfaction of the award conditions, final vesting will be determined.
None of the 2015 LTIP awards that vest will be subject to deferral as they were awarded to participants under the 2014 directors’ remuneration policy and therefore
are not subject to deferral.
Retail Revenue
Adjusted retail EBT*
Efficiency
Efficiency
Total vesting
Target
Performance Achievement
Target
Performance Achievement
Achievement
Achievement
Threshold
Maximum
Actual
Maximum
Threshold
Maximum
Actual
Maximum
Maximum
Maximum
Maximum
% of
% of
% of
% of
% of
Performance
Performance
Platform
Platform
Operational
Capital
Director
Tim Steiner
£1,330.0m
£1,430.0m
Duncan Tatton-Brown
£1,330.0m
£1,430.0m
Neill Abrams
Mark Richardson
£1,330.0m
£1,430.0m
£1,330.0m
£1,430.0m
£1,317.4
£1,317.4
£1,317.4
£1,317.4
0%
0%
0%
0%
£14.8m
£14.8m
£14.8m
£14.8m
£22.8m
£22.8m
£22.8m
£22.8m
£12.8
£12.8
£12.8
£12.8
0%
0%
0%
0%
0%
0%
0%
0%
25%
25%
25%
25%
25%
25%
25%
25%
£’000
£210
£97
£65
£97
1. The Remuneration Committee has agreed “threshold” and “maximum” conditions that must be achieved. An award will not vest unless a “threshold” level of the performance
condition has been achieved. At “threshold” performance for a financial performance measure, 6.25% of the total award will vest and 25% vesting will occur for achieving or
exceeding “maximum” performance for a condition. A straight-line sliding scale applies in relation to the intermediate points between the “threshold” and “maximum”.
2. Details of the number of conditional shares awarded to each Director for the 2015 LTIP awards are shown in the table on page 100.
* This measure is used by the Remuneration Committee to assess management performance for the 2015 LTIP only. It is not considered an Alternative Performance Measure.
Sharesave
A three-year savings contract under the Sharesave scheme matured on 1 December 2016. Tim Steiner, Duncan Tatton-Brown and Neill Abrams each held 2,987
Sharesave options at this date. At the date of vesting, the share price of 264 pence per share was lower than the exercise price of 301 pence per share, meaning that
the options had no value on vesting. During the exercise period, which ended in May 2017, the share price did not rise higher than the exercise price, and therefore
the options lapsed and the Directors withdrew the value of their savings of £9,000 each. Accordingly, a value of nil is shown in the Directors’ remuneration table.
A
See Alternative Performance
Measures on page 196
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95
Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
Share Incentive Plan
The 2014 award of free shares made under the SIP became unrestricted during the period on 10 September 2017. Certain matching shares also became
unrestricted during the period. Free shares and matching shares awarded under the SIP are subject to a three-year forfeiture period starting from the date of grant.
This means that if an Executive Director ceases to be employed by the Group during the three-year period, the free shares and matching shares will be forfeited.
Partnership shares purchased under the SIP are not included in the total remuneration table as these are purchased by the Executive Directors from their salary,
rather than granted by the Company as an element of remuneration. Only the value of free shares and matching shares that became unrestricted during the period
are shown in the total remuneration table. This is the first period in which shares became unrestricted. The value shown is the value of the shares on the date that
they became unrestricted. Unrestricted shares can be held in Trust under the SIP for as long as the participant remains an employee of the Company.
Recovery of Sums Paid (audited)
No sums paid or payable to the Executive Directors were sought to be recovered by the Group.
NON-EXECUTIVE DIRECTORS
Total Fees (audited)
The fees paid to the Non-Executive Directors and the Chairman during the period are set out in the remuneration table below. With the exception of Robert Gorrie
(who received other remuneration as set out below), the Non-Executive Directors received no remuneration from the Group other than their annual fee.
Non-Executive
Director
Lord Rose
Ruth Anderson
Jörn Rausing
Douglas McCallum
Andrew Harrison
Emma Lloyd
Robert Gorrie
Alex Mahon
Total
Fees
Taxable
Benefits
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Pension
Entitlements
2016
2017
£’000
£’000
200
62
50
62
50
50
25
62
561
200
61
49
61
37
—
49
56
543
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Annual
Bonus
Long-Term
Incentives
2017
£’000
2016
£’000
2017
£’000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2016
£’000
1,334
—
—
—
—
—
—
—
1,334
Recovery of
Sums Paid
2017
£’000
2016
£’000
Total
Remuneration
2016
2017
£’000
£’000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
200
62
50
62
50
50
25
62
561
1,534
61
49
61
37
—
49
56
1,847
1. The Chairman’s Share Matching Award of 452,284 shares vested on 10 May 2016. It was a one-off award made on Lord Rose’s appointment as Chairman of the Board. The value on
vesting was calculated using the closing share price of 295 pence per share on the day of vesting. Further details of the award can be found in the 2016 annual report.
2. David Grigson retired from the Board with effect from the 2016 annual general meeting. His fee in the prior year was £30,000.
3. Robert Gorrie retired from the Board with effect from the 2017 annual general meeting on 3 May 2017.
4. Alex Mahon retired from the Board with effect from 13 December 2017. The fees paid during 2017 are therefore her full fee and the following period’s fees will be disclosed in the 2018
annual report.
The remuneration arrangements for the Non-Executive Directors (except the Chairman) were reviewed by the Executive Directors and the Chairman during the
period and the basic fees for non-executive directors were not changed (2016: £50,000).
The review was carried out by the Executive Directors and Chairman in accordance with the Directors’ Remuneration Policy and accordingly took into account the
responsibility and time commitments of the roles of the Non-Executive Directors and Board committee chairmen, the financial position and trading performance
of the business, and the appropriate benchmark data (provided by Deloitte) for comparable roles for companies of equivalent size and complexity to the Group.
The Chairman’s fee was reviewed by the Remuneration Committee and was not changed. The Chairman’s fee has not changed since the Chairman’s appointment
in March 2013.
Other Remuneration for the Non-Executive Directors (audited)
In addition to the fees, the Non-Executive Directors are entitled to a staff shopping discount in line with the Group’s employees.
Until his retirement from the Board, Robert Gorrie chaired the meetings of the Ocado National Council and occasionally provided advice on various employee
matters, in addition to his role as a Non-Executive Director. He provided these services through Robert Gorrie Limited (of which he is the sole shareholder) and was
paid a per diem fee for these services. These fees are included in the related party transactions with key management personnel in Note 5.4 to the consolidated
financial statements.
The Company has obtained a written confirmation from each Non-Executive Director that they have not received any other items in the nature of remuneration
from the Group, other than those already referred to in this report.
Recovery of Sums Paid (audited)
No sums paid or payable to the Non-Executive Directors were sought to be recovered by the Group.
96
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 OTHER REMUNERATION DISCLOSURES
Executive Directors’ Service Contracts
Each of the Executive Directors has a service contract with the Group. The terms of these contracts are consistent with the Directors’ Remuneration Policy,
though the contracts provide for payment in lieu of notice of one times basic salary only (and do not include other fixed elements of pay, which are permitted by
the policy). The service contracts for each of the Executive Directors are continuous until terminated by either party (on 12 months’ notice if terminated by the
Company, or six months’ notice if terminated by the Director).
Non-Executive Directors’ Letters of Appointment
The Chairman and the Non-Executive Directors do not have service contracts and were appointed by letter of appointment for an initial period of three years,
subject to annual re-appointment at the annual general meeting. There are no provisions in the letters of appointment for payment for early termination. A Non-
Executive Director appointment may be terminated by either party giving to the other not less than one month’s notice, except in the case of the Chairman, which
requires six months’ notice by either party. A copy of a pro forma Non-Executive Director letter of appointment is available on the Company’s corporate website.
Copies of the letters of appointment and the service contracts of the Executive Directors are available for inspection at the Company’s registered office.
Deferral or Holding Periods (audited)
The 2017 Directors’ Remuneration Policy introduced a holding period of two years from the third anniversary of the date of grant under the LTIP. This is explained
on page 80.
Under the AIP, up to 50% of any bonus payment will be deferred into shares, vesting after a period of three years, to the extent that an Executive Director does not
meet the minimum shareholding.
The other Executive Director share schemes (including the GIP) do not contain any requirements for Directors to retain shares post vesting. However, the
Remuneration Committee feels that their absence is materially mitigated by the existing large shareholdings held by the Executive Directors in the Company
and by the five-year vesting period that applies to the GIP. Such factors help create a longer term focus from the Executive Directors and strong alignment with
shareholders, as envisaged by Code principle D.1.
Director Retirement Arrangements and Payments for Loss of Office (audited)
As announced on 18 November 2016 and 14 December 2017, it was determined in accordance with the 2014 Directors’ Remuneration Policy and the Directors'
Remuneration Policy respectively that the arrangements set out below should apply in relation to Robert Gorrie’s and Alex Mahon's remuneration on retirement.
Element of Remuneration
Remuneration Payments
Payment for Loss of Office
Share Schemes
Treatment
All outstanding fees were paid to Robert Gorrie up to 3 May 2017 in accordance
with the terms of his letter of appointment. No payments are expected after the
date of retirement, although Robert Gorrie was continued to be paid a fee for
services to the Group not in a Director capacity (as explained on page 96).
All outstanding fees were paid to Alex Mahon up to 13 December 2017 in
accordance with the terms of her letter of appointment. No payments are
expected after the date of retirement.
No payment for loss of office or other remuneration payment was made or is
expected to be made to Robert Gorrie or Alex Mahon.
At the time of retirement, neither Robert Gorrie nor Alex Mahon was a participant
in a Group share scheme.
Director Appointment Arrangements (audited)
As announced on 18 November 2016, Emma Lloyd was appointed to the Board as a Non-Executive Director with effect from 1 December 2016. Emma Lloyd’s
remuneration is in line with the Directors’ Remuneration Policy. On appointment, Emma Lloyd’s basic annual fee was £50,000, which was in line with the other
Non-Executive Directors. Emma Lloyd will not receive any other benefits or payments, in line with the Directors’ Remuneration Policy.
Payments to Past Directors (audited)
The Company does not have any arrangements for payments to any former Directors of the Company.
Enforcing the Directors’ Remuneration Policy
The Company has not made any payments to a Director outside of the Directors’ Remuneration Policy. All of the decisions regarding executive remuneration for
the period have been made in line with the Directors’ Remuneration Policy.
No Director has options over Company shares outside one of the Company’s recognised share schemes.
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Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
External Remuneration for Executive Directors
As at the date of this Annual Report:
•
•
•
In addition to his role as Executive Director of the Company, Neill Abrams is an alternate non-executive director of Mr Price Group Limited, listed on the
Johannesburg Stock Exchange. The role does not involve any remuneration paid or payable to Neill.
In addition to his role as Executive Director of the Company, Duncan Tatton-Brown is an independent non-executive director, senior independent director and
audit committee chairman of Zoopla Property Group plc, listed on the London Stock Exchange. For his services to Zoopla Property Group plc Duncan was paid
a fee of £65,000 in 2017.
In addition to his role as Executive Director of the Company, Mark Richardson is a non-executive director of Paneltex Limited. This role does not involve any
remuneration paid or payable to Mark.
DIRECTOR SHAREHOLDINGS (AUDITED)
The table below shows the beneficial interests in the Company’s shares of Directors serving at the end of the period, and their connected persons, as shareholders
and as discretionary beneficiaries under trusts. The table also shows current compliance with the Director shareholding requirements in the Directors’
Remuneration Policy as at the date of this Annual Report. All Directors comply with the Director shareholding requirements.
Ordinary Shares of 2 Pence
each held at
3 December 2017
Direct
Holding
Indirect
Holding Direct Holding
Ordinary Shares of 2 Pence
each held at
27 November 2016
Director
Tim Steiner
Lord Rose
Duncan Tatton-Brown
Mark Richardson
Neill Abrams
Ruth Anderson
Andrew Harrison
Emma Lloyd
Douglas McCallum
Jörn Rausing
Alex Mahon
15,245,052
1,202,284
583,041
265,530
768,867
80,000
18,166
17,300
100,000
—
17,355
14,293,130
—
61,869
6,994
1,319,704
—
—
—
—
69,015,602
—
15,205,557
1,202,284
561,363
243,808
754,386
80,000
11,500
—
100,000
—
17,355
Minimum
Shareholding
Requirement
(% of Base
Salary or Fee)
Complied with
Shareholding
Requirement?
200
100
200
200
200
100
100
100
100
100
100
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Basis for compliance
Indirect and direct shareholdings
Indirect and direct shareholdings
Indirect and direct shareholdings
JSOS and SIP interests
Direct shareholdings
Direct shareholdings
Direct shareholdings
Direct shareholdings
Direct shareholdings
Indirect shareholdings
Direct shareholdings
Indirect
Holding
14,292,464
—
61,247
6,328
1,319,048
—
—
—
—
69,015,602
—
1. The indirect holding for Neill Abrams includes holdings of Caryn Abrams (wife of Neill Abrams) who holds 79,701 (2016: 79,701) ordinary shares, Daniella Abrams (daughter of Neill
Abrams) who holds 1,363 (2016: 1,363) ordinary shares, Mia Abrams (daughter of Neill Abrams) who holds 1,363 (2016: 1,363) ordinary shares, Joshua Abrams (son of Neill Abrams)
who holds 1,363 (2016: 1,363) ordinary shares and as a discretionary beneficiary of a trust holding 133,100 (2016: 133,100) ordinary shares.
2. The indirect holding for Duncan Tatton-Brown includes a holding by Kate Tatton-Brown (wife of Duncan Tatton-Brown) who holds 59,889 (2016: 59,934) ordinary shares.
3. The indirect holding for Mark Richardson includes a holding by Rebecca Richardson (wife of Mark Richardson) who holds 4,970 (2016: 4,970) ordinary shares.
4.
There have been no changes in the Directors’ interests in the shares issued or options granted by the Company and its subsidiaries between the end of the period and the date of this Annual
Report, except shares held pursuant to the SIP, as set out on pages 102 to 103. There have been no changes in the Directors’ beneficial interests in trusts holding ordinary shares of the Company.
5. No Director had an interest in any of the Company’s subsidiaries at the beginning or end of the period.
6. Tim Steiner has granted a security interest over his ordinary shares in the Company. The security interest was granted in connection with a loan made to him. For further details, refer
to the Company’s announcement made on 28 November 2016. The security interest was granted over 15,197,812 ordinary shares in the Company and any further ordinary shares
held by Tim Steiner from time to time. Arthur Seligman as trustee of the Steiner 2008 Millennium Trust, of which Tim Steiner is one of a number of discretionary beneficiaries, granted
a security interest over 14,291,200 ordinary shares in the Company. On 24 November 2017, Arthur Seligman, as trustee of the Steiner 2008 Millennium Trust, transferred the 14,291,200
ordinary shares in the Company to Linic Ltd, a company wholly owned by Arthur Seligman, as trustee of the Steiner 2008 Millennium Trust. The existing security interest over the
shares was therefore released and a new security interest granted on similar terms on 24 November 2017. The shares therefore remain subject to a security interest. There was no
change in the underlying beneficial ownership of the shares.
7. On 13 May 2016, in respect of various contracts for the transfer of shares (as described on pages 235 and 238 of the Prospectus), Tim Steiner delayed the date on which completion
under the contracts for transfer would take place to 30 June 2019, or such later date as the parties may agree. As a result of the security interest granted over Tim Steiner’s ordinary
shares in the Company (see footnote 6), the completion of these contracts is conditional on the release of the security interest.
8. On 11 May 2016, in respect of various contracts for the transfer of shares (as described on pages 235 and 238 of the Prospectus), Neill Abrams delayed the date on which completion
under the contracts for transfer would take place to 30 June 2019, or such later date as the parties may agree.
9. Where applicable, the above indirect holdings include SIP Partnership Shares held under the SIP, which are held in trust.
10. The Executive Director shareholdings have increased during the period primarily due to the vesting of the 2014 LTIP awards. Read more on pages 100 to 101.
11. During the year, Non-Executive Director Robert Gorrie retired from the Board. Robert Gorrie held 415,660 ordinary shares at 27 November 2016 and on the date of his retirement on
3 May 2017, therefore complying with the shareholding requirement up to this date. His shareholdings were held directly.
12. Following the period end, Alex Mahon retired from the Board. Alex Mahon held 17,355 ordinary shares at 3 December 2017 and on the date of her retirement on 13 December 2017,
therefore complying with the shareholding requirements up to this date. Her shareholdings were held directly.
13. Where an Executive Director does not meet the minimum shareholding requirement, up to 50% of any cash bonus payable under the AIP as an award of shares must be deferred.
14. The assessment for shareholding compliance is based on the current annualised salary or fee (as set out in the total remuneration tables) which applied on 22 January 2018 (being
the last practicable date prior to the publication of this Annual Report) and the higher of the original purchase price(s) or the current market price (being 526 pence per share on
22 January 2018), of the relevant shareholdings.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 DIRECTOR INTERESTS IN SHARE SCHEMES (AUDITED)
JSOS (audited)
At the end of the period the Executive Directors’ interests in ordinary shares in the Company pursuant to the Group’s JSOS were as follows:
Director
Tim Steiner
Neill Abrams
Duncan Tatton-Brown
Mark Richardson
Type of interest
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Joint interest in shares
Date of
issue
Number of
share interests
Hurdle
Price
(£)
Vesting Date
03/02/10
03/02/10
03/02/10
03/02/10
03/02/10
03/02/10
03/02/10
03/02/10
01/11/12
01/11/12
03/02/10
03/02/10
03/02/10
03/02/10
30/11/12
30/11/12
2,513,100
2,513,100
2,513,100
2,513,000
1,017,200
1,017,200
1,017,200
1,017,100
365,000
1,100,000
223,300
223,300
223,300
223,200
711,975
776,700
1.73
1.91
2.08
2.28
1.73
1.91
2.08
2.28
1.70
1.80
1.73
1.91
2.08
2.28
1.70
1.80
01/01/11
01/01/12
01/01/13
01/01/14
01/01/11
01/01/12
01/01/13
01/01/14
01/01/13
01/01/14
01/01/11
01/01/12
01/01/13
01/01/14
01/01/13
01/01/14
Granted: No awards of JSOS share interests were made during the period. The Remuneration Committee does not, as at the date of this Annual Report, have any
intention of making a further award of share interests under the JSOS scheme to the current Executive Directors. The JSOS scheme, which was put in place prior to
the Company’s Admission in 2010, involves the Executive Directors investing their own funds to purchase a shared interest in the Company’s shares at the market
value at that time. These investments were made in 2010 (in the case of Tim Steiner, Neill Abrams and Mark Richardson) and in 2012 (in the case of Duncan Tatton-
Brown and Mark Richardson again). The Executive Directors invested from their own resources. The purchased interests entitle the Executive Directors to a return
only if, in the future, the share price exceeds the relevant hurdle rate. The Executive Directors would lose their investment if the share price were not to exceed the
hurdle price. For a detailed description of the JSOS scheme refer to pages 249 to 252 of the Prospectus.
Vested: No JSOS share interests vested during the period.
Sold: No JSOS share interests have been sold by an Executive Director since inception of the scheme.
Lapsed: No JSOS share interests lapsed during the period.
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99
Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Remuneration Report
LTIP (audited)
At the end of the period the Executive Directors’ total LTIP awards were as follows:
Director
Tim Steiner
Mark Richardson
Neill Abrams
Duncan Tatton-Brown
Type of Interest
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Conditional shares
Date of
Grant
13/03/15
17/03/16
20/02/17
13/03/15
17/03/16
20/02/17
13/03/15
17/03/16
20/02/17
13/03/15
17/03/16
20/02/17
Basis on
Which Award
is made
(% of Salary)
Number of
Shares
Face Value of
Award
(£)
End of
Performance
Period
Expected
Vesting Date
200
200
200
150
150
150
120
120
120
150
150
150
291,005
429,885
452,881
134,920
199,310
209,972
90,476
133,655
176,346
134,920
199,310
209,972
1,100,000
1,122,000
1,155,658
510,000
520,000
535,805
342,000
349,000
449,998
510,000
520,000
535,805
03/12/17
02/12/18
01/12/19
03/12/17
02/12/18
01/12/19
03/12/17
02/12/18
01/12/19
03/12/17
02/12/18
01/12/19
22/03/18
17/03/19
15/03/20
22/03/18
17/03/19
15/03/20
22/03/18
17/03/19
15/03/20
22/03/18
17/03/19
15/03/20
1. The LTIP awards are conditional awards under the rules of the LTIP, which is a right to receive free shares in the Company, subject to the achievement of performance conditions over
a three-year performance period.
2. The 2015 LTIP award was determined based on a price of 378 pence per share, being the volume weighted average price of the Company’s ordinary shares on the three trading days prior
to 13 March 2015 (being the LTIP grant date). The 2015 LTIP award is subject to the achievement of four equally weighted performance conditions for the 2016/2017 financial year, being
the third year of a three-year performance period. The performance conditions concerning the financial performance of the Group, both earnings before tax and revenue, are focused
on the Group’s retail business performance and weighted 25% each. The Ocado Solutions performance conditions each have a 25% weighting. In respect of a target, at “threshold”
performance, 6.25% of an LTIP award will vest and at “maximum” performance, 25% of an LTIP award will vest. Vesting will be on a straight-line basis between the “threshold” and the
“maximum”.
3. The 2015 LTIP awards are not capable of vesting until after the end of the period, on 22 March 2018.
4. The 2016 LTIP award was determined based on a price of 261 pence per share, being the volume weighted average price of the Company’s ordinary shares on the three trading days prior
to 17 March 2016 (being the LTIP grant date). The 2016 LTIP award is subject to the achievement of four equally weighted performance conditions for the 2017/2018 financial year, being
the third year of a three-year performance period. The performance conditions concerning the financial performance of the Group, both earnings before tax and revenue, will be focused
on the Group’s retail business performance and will be weighted 25% each. The proprietary infrastructure solution performance conditions will each have a 25% weighting and concern
platform operational efficiency and platform capital efficiency. In respect of a target, at “threshold” performance, 6.25% of an LTIP award will vest and at “maximum” performance, 25% of
an LTIP award will vest. Vesting will be on a straight-line basis between the “threshold” and the “maximum”.
5. The 2017 LTIP award is outlined below.
Granted: LTIP awards were made in respect of 2017 of up to 150% of annual base salary and in the case of the Chief Executive Officer, an LTIP award with a total
market value of 200% of annual base salary. Such awards were made in accordance with the Directors’ Remuneration Policy. The number of shares subject to an
LTIP award was determined based on a price of 255.1792 pence per share, being the volume weighted average price of the Company’s ordinary shares on the three
trading days prior to 20 February 2017 (being the LTIP grant date).
The 2017 LTIP awards are conditional awards under the rules of the LTIP, which are a right to receive free shares in the Company, subject to the achievement of
four equally weighted performance conditions. The performance metrics relate to the retail business and the platform business. The Remuneration Committee
believes that these performance conditions encourage the delivery of crucial strategic objectives of the Group. The performance conditions concerning the
financial performance of the Group, both earnings before tax and revenue, will be focused on the Group’s retail business performance and will be weighted 25%
each. The proprietary infrastructure solution performance conditions will each have a 25% weighting. The first concerns platform operational efficiency and the
second concerns sales of the Ocado Solutions platform.
The rationale for, and basis of measurement of, the performance metrics was as follows:
Performance target
Commercial rationale
Basis of measurement
Retail business (50%)
Platform business (50%)
Rewards top line sales growth for the retail business in line
with the Group’s strategy and the creation of financial returns
to shareholders.
Revenue and earnings before tax for the retail business for
the 2018/2019 financial year.
Rewards progress and achievement with the proprietary
infrastructure solution and Solutions business, which is a key
strategy objective.
Operational efficiency of the platform business and sales of the
Ocado Solutions platform.
The Remuneration Committee has agreed “threshold” and “maximum” conditions that must be achieved. No LTIP award will vest unless a “threshold” level of the
performance condition has been achieved. At “threshold” performance for a performance target, 6.25% of an LTIP award will vest and at “maximum” performance,
25% of an LTIP award will vest. Vesting will be on a straight-line basis between the “threshold” and the “maximum”. Each target is discrete and can be earned
separately. Full vesting will only occur where exceptional performance levels have been achieved and significant shareholder value created.
100
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 The performance conditions for the 2017 LTIP awards will be tested in relation to the financial year ending in 2019 (except in the case of the Ocado Solutions target
which measures performance over the three year performance period) to determine what percentage of the LTIP awards has been achieved, and will vest during
2020 to the extent that the performance conditions have been achieved. Any 2017 LTIP awards that vest will not be subject to deferral as they were awarded to
participants under the 2014 directors’ remuneration policy and therefore are not subject to deferral.
The specific performance conditions are not disclosed due to their commercial sensitivity on the basis that if disclosed it would be likely to damage the Company’s
commercial interests. The Company will disclose the performance conditions after the end of the performance period, to the extent that the targets are not
considered commercially sensitive at the time.
Vested: The 2014 LTIP awards had a vesting date of 31 March 2017 for a three-year performance period that ended with the 2015/2016 financial year. As explained
in the 2016 annual report, the Remuneration Committee reviewed the performance against the award’s two equally weighted performance conditions, which were
the levels of diluted and adjusted earnings per share, and Group revenue, for the 2015/2016 financial year. The Group’s diluted and adjusted earnings per share for
the period was 3.075 pence per share, which was above the threshold performance target of 1.3 pence per share but below the maximum performance target of 3.5
pence per share. Accordingly, achievement against the performance target was 42.76%. The Group’s revenue for the period was £1,271.0 million, which was below
the threshold performance target of £1,385.5 million. Consequently, achievement against the performance target was 0% and therefore overall 42.76% of the award
vested.
The performance period for the 2015 LTIP awards finished in the year, although these awards are not capable of vesting until 22 March 2018 (as noted on page 100).
Sold: As a result of the vesting of the 2014 LTIP awards, the Executive Directors sold shares in the Company. The Directors sold sufficient of the shares that vested
to cover the cost of the tax and National Insurance. The details of the LTIP vesting and resulting share sale for each Executive Director are set out below.
Director
Tim Steiner
Duncan Tatton-Brown
Mark Richardson
Neill Abrams
Date of
Grant
Grant price
(£)
Number of
Shares
Vested
Date of Vesting
and Sale
Share Price on
Vesting
(£)
Value of
Shares Vested
(£)
Shares
Sold on
Vesting
Shares
Retained on
Vesting
05/02/14
05/02/14
05/02/14
05/02/14
5.155
5.155
5.155
5.155
74,653
41,059
41,059
27,373
31/03/17
31/03/17
31/03/17
31/03/17
2.49007
2.49007
2.49007
2.49007
185,891
102,240
102,240
68,161
35,158
19,337
19,337
12,892
39,495
21,722
21,722
14,481
1.
For more details see the total remuneration table on page 92.
Lapsed: No LTIP awards lapsed during the period.
GIP (AUDITED)
At the end of the period, the Executive Directors’ total GIP awards were as follows:
Director
Type of Interest
Date of
Grant
Number of
Share Options
Face Value of
Award
(£)
End of
Performance
Period
Tim Steiner
Mark Richardson
Duncan Tatton-Brown
Option with nil exercise price
Option with nil exercise price
Option with nil exercise price
08/05/14
08/05/14
08/05/14
4,000,000
1,000,000
1,000,000
12,744,000
3,186,000
3,186,000
08/05/19
08/05/19
08/05/19
Exercise Period
08/05/19 – 31/05/24
08/05/19 – 31/05/24
08/05/19 – 31/05/24
1. The face value of the options which are the subject of a GIP award was determined based on a price of 318.60 pence per share being the price on date of grant. A condition of vesting
is that each participant holds, and retains throughout the performance period, shares in the Company. The Chief Executive Officer is required to hold shares equivalent, at the date
of the award, to the value of his annual salary. Both other participants are required to hold shares equivalent, at the date of the award, to the value of half of their annual salary.
The GIP award is subject to the achievement of a single performance condition to be satisfied over five years commencing on the date of grant of the awards. The share price of the
Company is the sole performance measure, and will be assessed relative to the growth of the FTSE 100 Share Index over that period assessed using a three-month averaging period.
The performance schedule is set out in the table below:
Performance target
Growth of less than the FTSE 100 Share Index +5% p.a.
Growth in the FTSE 100 Share Index +5% p.a.
Growth in the FTSE 100 Share Index +10% p.a.
Growth in the FTSE 100 Share Index +15% p.a.
Growth in the FTSE 100 Share Index +20% p.a. (or more)
Granted: No awards under the GIP were granted during the period.
Vested: No awards under the GIP vested during the period. The awards are expected to vest in May 2019 (if and to the extent that the vesting criteria are met).
Sold: No awards under the GIP have been exercised or sold by an Executive Director during the period.
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Percentage of
award vesting (%)
0
25
50
75
100
101
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Lapsed: No awards under the GIP lapsed during the period.
ESOS (AUDITED)
At the end of the period, the Executive Directors held options under the ESOS as follows:
Director
Mark Richardson
Duncan Tatton-Brown
Type of Interest
Date of
Grant
Number of
Share Options
Exercise Price
(£)
Option
Option
31/05/09
12/08/13
70,000
9,923
1.20
3.02
Face Value of
Grant
(£)
84,000
29,967
Exercise
Period
31/05/12 – 30/05/19
08/07/16 – 07/07/23
Granted: The Remuneration Committee does not, as at the date of this Annual Report, have any intention of making a further award of options under the ESOS
scheme to the existing Executive Directors. Existing options held by the Executive Directors under the ESOS were granted prior to the Company’s listing in 2010
(except those granted in 2013 to then new appointee Director, Duncan Tatton-Brown). None of the grants of ESOS options to the Executive Directors are subject to
performance conditions.
Vested: No awards under the ESOS vested during the period.
Sold: No awards under the ESOS have been exercised or sold by an Executive Director during the period.
Lapsed: No options under the ESOS lapsed during the period.
2014 ESOS (AUDITED)
No awards have been granted to the Executive Directors under the 2014 ESOS, and the Remuneration Committee does not have any intention of making an award
of options under the 2014 ESOS scheme to the existing Executive Directors. Accordingly, no value is shown in the total remuneration table for the period.
SIP (AUDITED)
At the end of the period, interests in shares held by the Executive Directors under the SIP were as follows:
Director
Tim Steiner
Duncan Tatton-Brown
Mark Richardson
Neill Abrams
Partnership
Shares
Acquired in
the Year
Matching
Shares
Awarded in
the Year
666
667
666
666
95
95
95
95
Free Shares
Awarded in
the Year
1,240
1,240
1,240
1,061
Total Face
Value of
Free Shares
and Matching
Shares
Awarded
in the Year
(£)
3,854
3,854
3,854
3,335
Total SIP
Shares Held
3/12/2017
SIP Shares
that Became
Unrestricted
in the Period
6,997
6,940
6,991
6,258
1,177
1,120
1,126
948
Total
Unrestricted
SIP Shares
Held at
3/12/2017
1,177
1,120
1,126
948
1. Unrestricted shares are those which have been held beyond the three-year forfeiture period.
2. The value of the share awards made under the SIP is based on the middle market quotation of a share on the trading day immediately preceding the date of grant.
Granted: The Directors continued their SIP participation during the period. The SIP scheme is made available to all employees. The SIP allows for the grant of a
number of different forms of awards. An award of free shares was made to the Executive Directors in September 2017 under the terms of the SIP and the Directors’
Remuneration Policy. “Free shares” of up to £3,600 of ordinary shares may be allocated to any employee in any year. Free shares are allocated to employees
equally on the basis of salary, as permitted by the relevant legislation.
An award of matching shares was made to those Executive Directors who purchased partnership shares (using deductions taken from their gross basic pay) under
the terms of the SIP and in accordance with the Directors’ Remuneration Policy. “Partnership shares” are where employees are invited to purchase ordinary shares
directly from their earnings. The market value of such partnership shares which an employee can purchase in any tax year currently may not exceed £1,800 (or
10% of the relevant employee’s remuneration, if lower). “Matching shares” are additional free shares which may be allocated to an employee who purchases
partnership shares. The rules of the SIP reflect current UK legislation and allow for a maximum matching ratio of two to one. The matching ratio adopted by the
Company for the SIP during the period was a ratio of one matching share for every seven partnership shares purchased, considerably lower than the maximum
permitted ratio.
102
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 There are no performance conditions attached to awards made under the SIP, although free shares and matching shares are subject to a three-year forfeiture
period. Partnership shares are purchased by the employees and therefore forfeiture does not apply. Free shares and matching shares awarded under the SIP are
subject to a holding period of no less than three years but no more than five years. Shares held in trust for more than five years are not subject to income tax or
National Insurance contributions on withdrawal. Partnership shares purchased by employees are not subject to a holding period.
The Executive Directors continued their membership in the SIP after the end of the period and were therefore awarded further matching shares pursuant to the
SIP rules. Between the end of the period and 22 January 2018, being the last practicable date prior to the publication of this Annual Report, the Executive Directors
acquired or were awarded further shares under the SIP as set out in the table below:
Director
Tim Steiner
Duncan Tatton-Brown
Mark Richardson
Neill Abrams
Partnership
Shares
Acquired
Matching
Shares
Awarded
Free Shares
Award
79
78
79
79
12
12
11
11
—
—
—
—
Total Face
Value of Free
Shares
and Matching
Shares
(£)
45
45
42
42
Total SIP
Shares
Held at
22/01/2018
7,088
7,030
7,081
6,348
1. The value of the share awards made under the SIP is based on the middle market quotation of a share on the trading day immediately preceding the date of grant.
Vested: For details of free shares and matching shares that became unrestricted in the period, see page 102. Only the value of free and matching shares that
became unrestricted during the period is shown in the total remuneration table. Unrestricted shares can be held in Trust under the SIP for as long as the
participant remains an employee of the Company.
Sold: No shares held under the SIP have been sold by an Executive Director.
Lapsed: No shares held by an Executive Director under the SIP lapsed during the period.
SHARESAVE SCHEME (AUDITED)
At the end of the period, the Executive Directors’ option interests in the Sharesave scheme were as follows:
Director
Tim Steiner
Neill Abrams
Duncan Tatton-Brown
Mark Richardson
Type of Interest
Date of
Grant
Number of
Share Options
Exercise Price
(£)
Face Value
(£)
Options
Options
Options
Options
05/08/16
05/08/16
05/08/16
05/08/16
7,894
7,894
7,894
7,894
2.28
2.28
2.28
2.28
17,998
17,998
17,998
17,998
Exercise Period
01/12/19 – 01/05/20
01/12/19 – 01/05/20
01/12/19 – 01/05/20
01/12/19 – 01/05/20
Granted: No awards under the Sharesave were granted during the period.
Vested: For details of vested Sharesave options, see page 95.
Exercised: No awards under the Sharesave were exercised or sold by the Executive Directors during the period.
Lapsed: A savings contract under the Sharesave scheme matured on 1 December 2016. Tim Steiner, Duncan Tatton-Brown and Neill Abrams each held 2,987
options at this date. Participants were able to exercise their options until the end of the exercise period in May 2017. During the exercise period, the share price did
not rise higher than the exercise price and therefore the options lapsed and the Directors withdrew their savings.
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DILUTION
Dilution Limits
Awards granted under the Company’s Sharesave, ESOS, 2014 ESOS and SIP schemes are met by the issue of new shares when the options are exercised or shares
granted. The allocation of awards under the JSOS were met by the subscription for new shares by the participant and the EBT. Awards granted under the GIP may
be met by the issue of new shares, the transfer of shares from treasury, or the purchase or transfer of existing shares by the EBT (where available). Awards vesting
under the LTIP are typically satisfied by the issue of new shares and transfer of existing shares by the EBT. The share deferral provisions in the AIP have not been
approved by shareholders and accordingly awards will be satisfied only by the purchase of existing shares by the EBT until such shareholder approval is obtained.
There are limits on the number of shares that may be allocated under the Company’s share plans. These dilution limits were recommended by the Remuneration
Committee and incorporated into the rules of the various share schemes, which have been approved by the Company’s shareholders.
The dilution limits restrict the commitment to issue new ordinary shares or reissue treasury shares under all share schemes of the Group to 10% of the nominal
amount of the Company’s issued share capital and under the JSOS, the LTIP and the GIP (and any other selective share scheme) to 5% of the nominal amount of
the issued share capital of the Company in any rolling ten-year period. These limits are consistent with the guidelines of institutional shareholders.
The JSOS rules have additional overriding limits on the number of shares that may be allocated under the JSOS. Up to 7.5% of the Company’s ordinary issued
share capital may be held under the JSOS.
Impact on Dilution
The Company monitors the number of shares issued under these schemes and their impact on dilution. The charts below show the Company’s commitment, as
at the last practicable date prior to the publication date of this Annual Report being 22 January 2018, to issue new shares in respect of its share schemes assuming
all performance conditions are met, all award holders remain in employment to the vesting date and all awards are settled in newly issued shares. For these
purposes, no account is taken of ordinary shares allocated prior to the Company’s Admission.
ALL SHARE PLANS
Actual: 5.96%
Limit: 10.00%
DISCRETIONARY SHARE PLANS
Actual: 3.38%
Limit: 5.00%
Review of Changes in Remuneration and Company Performance
This part of the report provides some context for the Directors’ remuneration arrangements including information concerning the Company’s performance,
shareholder returns and the Group’s total expenditure on employee pay.
104
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Chief Executive Officer Historical Remuneration
The table below summarises in respect of the Chief Executive Officer the single figure of total remuneration, the AIP or bonus plan payment as a percentage of
maximum opportunity, and the long-term incentives as a percentage of maximum opportunity for the current period and the previous seven financial years.
Year
2017
2016
2015
2014
2013
2012
2011
2010
Chief
Executive
Officer
Total
Remuneration
(£’000)
AIP or Bonus
Payment as
a Percentage
of Maximum
Target
Achievement
(%)
Long-Term
Incentives as
a Percentage
of Maximum
Opportunity
(%)
Value of
AIP or Bonus
Payment
(£’000)
1,164
1,141
5,098
6,483
1,011
483
987
599
41.8
43.6
65.0
56.0
98.3
29.7
0
n/a
310
315
459
385
528
104
0
220
33.4
43.2
90.8
100
0
0
100
0
1. The Chief Executive Officer total remuneration figures prior to the 2013 period represent the previously presented audited information with necessary adjustments for amounts
2.
required to be included in the single total figure of remuneration (such as pension amounts) under the new regulations (which first applied to the 2013 financial period).
From 2010, the Company had the JSOS as the main form of long-term incentive plan. In 2011, the first tranche of JSOS shares vested in that period. For the 2012 and 2013 financial
years, the JSOS interests did not have any value at the vesting date. In 2014, the final tranche of JSOS shares vested in that period (the value of such remuneration is noted in the
single total figure of remuneration above). The LTIP was implemented in 2013 and the first award had a performance period ending in 2015 and a vesting date in 2016. The GIP and
SIP were both implemented in 2014, but have vesting dates in 2019 and 2017 respectively.
3. The total remuneration amounts shown above are the amounts restated so as to account for the final vesting of the LTIP awards. For an explanation of this restatement in respect of
the 2016 period see note 1 of the total remuneration table on page 92. For details of the 2017 period LTIP value, see note 2 of the total remuneration table.
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Chief Executive Officer Percentage Change Versus Employee Group
To put the Directors’ remuneration into context, the table below sets out the change in salary, benefits, and bonus of the Chief Executive Officer and of all of the
Group’s employees from the preceding period to the current period.
Percentage change in salary from 2016 to 2017
Percentage change in taxable benefits from 2016 to 2017
Percentage change in AIP earned from 2016 to 2017
Chief
Executive
Officer
2.8%
100%
(1.6)%
All UK
employees
4.1%
(15.2)%
n/a
1. Most of the Group’s employees are not entitled to earn an annual bonus payment as part of their remuneration.
2. The change in salary data for the Group’s employees is on a per capita basis.
RELATIVE IMPORTANCE OF SPEND ON PAY
The following table shows the Company’s profit and total Group-wide expenditure on pay for all employees for the period and last financial year. The Company
has not paid a dividend or carried out a share buyback in the current year or previous year. The information shown in this chart is:
• Profit – Group profit before tax as set out in Note 2.1 to the consolidated financial statements.
• Total gross employee pay – total gross employment costs for the Group (including pension, variable pay, share-based payments and social security) as set out
in Note 2.6 to the consolidated financial statements.
Profit before tax
Total gross employee pay
3 December
2017
(£m)
27 November
2016
(£m)
1.0
335.9
12.1
287.7
COMPANY SHARE PRICE
The closing market price of the Company’s shares as at 1 December 2017, being the last trading day in the period ended 3 December 2017, was 363.5 pence per
ordinary share (2016: 275.8 pence) and the share price range applicable during the period was 238.5 pence to 363.5 pence per ordinary share.
TOTAL SHAREHOLDER RETURN
The following graph shows the TSR performance of an investment of £100 in the Company’s shares from its Admission to the end of the period compared with an
equivalent investment in the FTSE 250 Index (which was chosen because it represents a broad equity market index of which the Company is a constituent). The
TSR was calculated by reference to the movements in share price. The Company has not paid a dividend since its Admission so the Company’s TSR does not factor
in dividends reinvested in shares.
FTSE 250
Ocado Group plc
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0
106
02 Nov 2010
18 Nov 2011
17 Dec 2012
15 Nov 2013
02 Dec 2014
01 Nov 2015
25 Nov 2016
01 Dec 2017
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 ANNUAL REPORT ON REMUNERATION — IMPLEMENTATION OF POLICY FOR 2018
Introduction
This part of the Directors’ Remuneration Report sets out implementation of the Directors’ remuneration for 2018.
Summary of Changes for Executive Directors
This table briefly summarises the proposals for the Directors’ remuneration arrangements for 2018 when compared to the arrangements for the period.
Base Salary and Benefits
Pension
AIP
Long-Term Incentives
All-Employee Schemes
Base salary will be subject to
annual review.
No changes proposed.
No change to the maximum
opportunity or structure of
the 2018 AIP. A change to the
measures of the 2018 AIP.
No change to the maximum
opportunity for the 2018 LTIP
awards.
A change to the measures.
Ongoing participation in the
SIP and Sharesave.
Base Salary and Benefits
The Remuneration Committee expects to finalise its annual review of the Executive Directors’ base salaries later in 2018, in line with the timing of pay reviews for
all of the Group’s employees.
The benefits in kind offered to the Executive Directors are expected to remain unchanged.
Pensions
No changes are proposed to the pension contributions for Executive Directors for 2018, which are expected to remain at the levels provided in the current period.
2018 AIP
The Remuneration Committee approved the implementation of an AIP for the Executive Directors applicable to the 2017/18 financial year. This plan is in line with
the Directors’ Remuneration Policy.
The bonus potential for the Executive Directors is 100% and for the Chief Executive Officer is 125% of base salary for “maximum” performance, which is the same
as the 2017 AIP.
There will be four objectives in the 2018 AIP, with the weighting as 25% for each of a Gross Sales A (Retail) target, a Group EBITDA A target, an Ocado Solutions
target, and performance measured against role-specfic objectives. The rationale for setting the performance measures was considered by the Remuneration
Committee, which introduced a fourth performance measure, an Ocado Solutions target, to align the performance measures for the plan with the evolving Group
strategy concerning the Ocado Solutions business.
The Remuneration Committee has agreed "threshold" and “maximum” conditions that must be achieved. A bonus is not payable unless a “threshold” level of the
performance condition has been achieved. At “threshold” performance for a financial performance measure, 6.25% of total bonus is payable and at “maximum”
performance, 25% of total bonus is payable. A straight-line sliding scale will apply in relation to the intermediate points between the “threshold” and “maximum”.
Each target was discrete and could be earned separately. The Chief Executive Officer had a maximum bonus opportunity of 125% of salary and the other Executive
Directors had a maximum opportunity of 100% of salary.
The actual performance targets are not disclosed due to their commercial sensitivity on the basis that if disclosed it would likely damage the Company’s
commercial interests. The Company will disclose achievement against the targets after the end of the performance period, provided such disclosure is not
considered commercially sensitive at the time.
A
See Alternative Performance
Measures on page 196
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Remuneration Report
2018 LTIP Awards
The Remuneration Committee approved the making of awards under the LTIP for the Executive Directors for the 2017/2018 financial year. The amount of the LTIP
awards is based on a percentage of salary, expected to be in line with the percentages agreed for the 2017 LTIP awards and in line with the Directors’ Remuneration
Policy.
The Remuneration Committee proposes to make 2018 LTIP award grants subject to revenue and retail EBIT performance conditions in respect of the retail
business for the 2019/2020 financial year. The other two performance targets relate to the platform business. The first of these is linked to the efficiency of the
platform solution for the 2019/2020 financial year. The second of the platform business targets will be focused on expanding the Ocado Solutions business
and specifically generating sales revenue for the 2019/2020 financial year. The 2018 LTIP award targets differ from the 2017 awards firstly, in that the new retail
profitability measure will be aligned with the Group's new segmental reporting and secondly by including capital efficiency (together with operational efficiency)
when measuring performance of the platform business. These changes to the LTIP performance targets reflect the Board’s focus on rewarding the delivery of sales
of the platform solution to new customers and continuing to incentivise improvements in efficiency, while rewarding the profitable growth of the retail business.
Each performance condition will have a 25% weighting.
The actual performance targets are not disclosed due to their commercial sensitivity on the basis that if disclosed it would likely damage the Company’s
commercial interests. The Company will disclose achievement against targets after the end of the performance period, provided such disclosure is not considered
commercially sensitive at the time.
SIP
The Executive Directors are expected to continue their participation in the SIP scheme in 2018.
Changes for Non-Executive Directors and Chairman
The review of remuneration of the Non-Executive Directors and the Chairman will be finalised in line with the timing of pay reviews for all of the Group’s
employees.
108
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Shareholder Approval and Votes at AGM
The 2017 Directors’ Remuneration Report will be subject to a shareholder vote at the AGM. Entitlement of a Director to remuneration is not made conditional on
this resolution being passed.
The Remuneration Committee Chairman is committed to ongoing shareholder dialogue on Directors’ remuneration and takes an active interest in voting
outcomes. In the event of a substantial vote against a resolution in relation to the Directors’ Remuneration Report, the Directors’ Remuneration Policy or a new
share scheme, the Company would seek to understand the reasons for any such vote and would detail in the announcement of the results of voting any actions it
intends to take to understand the reasons behind the vote result and also note this in the next annual report. The Remuneration Committee considers that a vote
against that exceeds 20% should be considered significant and requires explanation.
The table below sets out the actual voting in respect of resolutions regarding remuneration at the three previous annual general meetings.
Resolution Text
Votes For
% For
Votes Against
% Against
Total Votes
Votes
Withheld
2017 AGM
Approve the 2017 Directors’ Remuneration Policy
Approve the 2016 Directors’ Remuneration Report
2016 AGM
Approve the 2015 Directors’ Remuneration Report
2015 AGM
Approve the 2014 Directors’ Remuneration Report
416,068,306
413,472,812
93.75
93.16
27,747,647
30,342,020
6.25
6.84
448,607,479
448,607,479
4,791,526
4,792,647
314,587,371
91.48
29,304,819
8.52
345,048,769
1,156,579
377,215,710
80.61
90,709,506
19.39
476,384,487
8,459,271
BASIS OF PREPARATION AND AUDIT
This report is a Directors’ Remuneration Report for the 53 weeks ended 3 December 2017, prepared for the purposes of satisfying section 420(1) and section
421(2A) of the Companies Act. It has been drawn up in accordance with the Companies Act and the Code, the Regulations, the Listing Rules and the Disclosure
Guidance and Transparency Rules.
In accordance with section 497 of the Companies Act and the Regulations, certain parts of this Directors’ Remuneration Report (where indicated) have been
audited by the Company’s auditors, Deloitte LLP.
A copy of this Directors’ Remuneration Report will be available on the Company’s corporate website.
This Directors’ Remuneration Report is approved by the Board and signed on its behalf by:
Douglas McCallum
REMUNERATION COMMITTEE CHAIRMAN
Ocado Group plc
6 February 2018
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INTRODUCTION
This section of this Annual Report is
a Directors’ Report required by the
Companies Act to be prepared by the
Directors for the Company and the
Group.
INDEX OF DIRECTORS’ REPORT
DISCLOSURES
This Directors’ Report should be read
in conjunction with the Strategic
Report (pages 06 to 47) which includes
Corporate Responsibility (pages 42 to
45), and the Statement of Corporate
Governance (defined in the index below
as the “CG Statement”) (pages 54 to 61),
which are incorporated by reference into
this Directors’ Report.
The information required to be disclosed
in the Directors’ Report can be found in
this Annual Report on the pages listed
below. Pursuant to Listing Rule 9.8.4C,
the information required to be disclosed
in the Annual Report under Listing Rule
9.8.4R is marked with an asterisk (*).
Amendment of the Articles
American Depositary Receipt (ADR) program
Appointment and replacement of Directors
Board of Directors
Change of control
Community
Directors’ insurance and indemnities
Directors’ inductions and training
Directors’ interests
Directors’ responsibility statement
Disclosure of information to auditors
Diversity
Employee involvement
Employees with disabilities
Future developments of the business
Going concern and viability statements*
Greenhouse gas emissions
Independent auditors
Long-term incentive plans under Listing Rule 9.4.3*
Political donations
Post-balance sheet events
Powers for the Company to issue or buy back its shares
Powers of the Directors
Profit/loss and dividends
Research and development activities
Restrictions on transfer of securities
Rights attaching to shares
Risk management and internal control
How the business manages risk
Note 4.8 to the consolidated financial statements
Share capital
Significant agreements
Significant related party agreements*
Significant shareholders
Statement of corporate governance
Strategic Report
Voting rights
111
113
111
CG Statement 52, 116-117
114
Corporate Responsibility 42-45
111
CG Statement 59
Directors’ Remuneration Report 98
114-115
114
Our People 46
Our People 47
114
Strategic Report 06-47
Strategic Report 39
Corporate Responsibility 43
114
Directors’ Remuneration Report 70-109
Corporate Responsibility 44
114
112
CG Statement 54-55
114
Strategic Report 06-47
112
111
Strategic Report 38-41
161-163
111
114
113
113
CG Statement 54-61
06-47, 111
112
110
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 THE STRATEGIC REPORT
The Directors are required under the Companies Act to prepare a strategic
report for the Company and the Group. The Strategic Report contains the
Directors’ explanation of the basis on which the Group preserves and creates
value over the longer term and the strategy for delivering the objectives of the
Group. The Companies Act requires that the Strategic Report must:
•
contain a fair review of the Group’s business and contain a description of
the principal risks and uncertainties facing the Group; and
• be a balanced and comprehensive analysis of the development and
performance of the Group’s business during the financial year and the
position of the Group’s business at the end of that year, consistent with the
size and complexity of the business.
The information that fulfils the strategic report requirements is set out in the
Strategic Report on pages 06 to 47.
The Company has chosen to include some of the information required to be
disclosed in the Directors’ Report within the Strategic Report (pages 06 to 47),
as noted above. Certain matters, including those of sufficient importance, that
would otherwise be required to be disclosed in the Directors’ Report, have
been set out in the Strategic Report and Statement of Corporate Governance,
as noted in the index on page 110.
The Strategic Report and the Directors’ Report (or parts thereof), together
with sections of this Annual Report incorporated by reference, are the
“Management Report” for the purposes of the Disclosure Guidance and
Transparency Rule 4.1.8.
The Strategic Report and the Directors’ Report, together with the sections
of this Annual Report incorporated by reference, have been drawn up and
presented in accordance with and in reliance upon applicable English
company law and the liabilities of the Directors in connection with that report
shall be subject to the limitations and restrictions provided by such law.
For an explanation of how the Board satisfies itself that this Annual Report
meets the disclosure requirements, refer to the Statement of Corporate
Governance on pages 54 to 61 and the Directors’ responsibility statement
on pages 114 and 115.
AMENDMENT OF THE ARTICLES
The Company’s Articles, which govern a number of constitutional aspects of
the Company’s management, may be amended by a special resolution of its
shareholders.
APPOINTMENT AND REPLACEMENT OF DIRECTORS
The appointment and replacement of Directors of the Company is governed
by the Articles.
Appointment of Directors: A Director may be appointed by the Company
by ordinary resolution of the shareholders or by the Board. The Board or any
committee authorised by the Board may from time to time appoint one or
more Directors to hold any employment or executive office for such period
and on such terms as they may determine and may also revoke or terminate
any such appointment. A Director appointed by the Board holds office only
until the next annual general meeting of the Company and is then eligible for
re-appointment.
Retirement of Directors: At every annual general meeting of the Company,
each Director shall retire from office and may offer himself for re-appointment
by the members.
Removal of Directors by Special Resolution: The Company may by special
resolution remove any Director before the expiration of his period of office.
Vacation of Office: The office of a Director shall be vacated if: (i) he resigns;
(ii) his resignation is requested by all of the other Directors (not less than three
in number); (iii) he is or has been suffering from mental or physical ill health
and the Board resolves that his office be vacated; (iv) he is absent without
the permission of the Board from meetings of the Board (whether or not an
alternate Director appointed by him attends) for six consecutive months and
the Board resolves that his office is vacated; (v) he becomes bankrupt; (vi) he
is prohibited by law from being a Director; (vii) he ceases to be a Director by
virtue of the Companies Act; or (viii) he is removed from office pursuant to
the Articles.
For a description of any changes of the Company’s Directors during the period
see the Statement of Corporate Governance on pages 54 to 61.
DIRECTORS’ INSURANCE AND INDEMNITIES
The Company maintains directors’ and officers’ liability insurance cover for
its Directors and officers as permitted under the Articles and the Companies
Act. Such insurance policies were renewed during the period and remain
in force as at the date of this Annual Report. The Company also agrees to
indemnify the Directors under an indemnity deed with each Director which
contains provisions that are permitted by the director liability provisions of the
Companies Act and the Articles. An indemnity deed is usually entered into by a
Director at the time of his or her appointment to the Board.
SHARE CAPITAL
The Company’s authorised and issued ordinary share capital as at
3 December 2017 comprised a single class of ordinary shares. The shares have
a nominal value of 2 pence each. The ISIN of the shares is GB00B3MBS747. The
LEI of the Company is 213800LO8F61YB8MBC74.
As at 22 January 2018, being the last practicable date prior to publication
of this report, the Company’s issued share capital consisted of 631,298,705
issued ordinary shares, compared with 629,270,054 issued ordinary shares per
the 2016 annual report. Details of movements in the Company’s issued share
capital can be found in Note 4.9 to the consolidated financial statements.
During the period, shares in the Company were issued to satisfy options and
awards under the Company’s share and incentive schemes, as set out in Note
4.9 to the consolidated financial statements.
RIGHTS ATTACHING TO SHARES
The Company’s shares when issued are credited as fully paid and free from
all liens, equities, charges, encumbrances and other interests. All shares have
the same rights (including voting and dividend rights and rights on a return of
capital) and restrictions as set out in the Articles, described below.
Except in relation to dividends which have been declared and rights on a
liquidation of the Company, the shareholders have no rights to share in the
profits of the Company.
The Company’s shares are not redeemable. However, the Company may
purchase or contract to purchase any of the shares on or off-market,
subject to the Companies Act and the requirements of the Listing Rules, as
described below.
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No shareholder holds shares in the Company which carry special rights with
regard to control of the Company. There are no shares relating to an employee
share scheme which have rights with regard to control of the Company that
are not exercisable directly and solely by the employees, other than in the
case of the JSOS, where share interests can be transferred to a spouse, civil
partner or lineal descendant of a participant in the JSOS or certain trusts
under the rules of the JSOS (as noted below).
VOTING RIGHTS
Each ordinary share carries one right to vote at a general meeting of the
Company. At any general meeting, a resolution put to the vote of the meeting
shall be decided on a show of hands unless a poll is demanded. On a show
of hands, every member who is present in person or by proxy at a general
meeting of the Company shall have one vote. On a poll, every member who
is present in person or by proxy shall have one vote for every share of which
they are a holder. The Articles provide a deadline for submission of proxy
forms of not less than 48 hours before the time appointed for the holding of
the meeting or adjourned meeting. No shareholder shall be entitled to vote in
respect of a share held by him if any call or sum then payable by him in respect
of such share remains unpaid or if a member has been served a restriction
notice, described below.
JSOS Voting Rights: Of the issued ordinary shares, as at 3 December 2017
32,800,390 (2016: 32,830,613) were held by Wealth Nominees Limited on
behalf of Estera Trust (Jersey) Limited, the independent company which is the
trustee of Ocado’s employee benefit trust (the “EBT Trustee”). The EBT Trustee
has waived its right to exercise its voting rights in respect of 32,724,358 of these
ordinary shares, although it may at the request of a participant vote in respect
of 76,032 ordinary shares which have vested under the JSOS and remain in
the trust at period end. The total of 32,800,390 ordinary shares held by the EBT
Trustee are treated as treasury shares in the Group’s Consolidated Balance
Sheet in accordance with IAS 32 “Financial Instruments: Presentation”. As
such, calculations of earnings per share for Ocado exclude the 32,800,390
ordinary shares held by the EBT Trustee. Note 4.9 to the consolidated financial
statements provides more information on the Group’s accounting treatment of
treasury shares.
RESTRICTIONS ON TRANSFER OF SECURITIES
The Company’s shares are freely transferable, save as set out below.
The transferor of a share is deemed to remain the holder until the transferee’s
name is entered in the register. The Board can decline to register any transfer
of any share which is not a fully paid share. The Company does not currently
have any partially paid shares. The Board may also decline to register a
transfer of a certificated share unless the instrument of transfer: (A) is duly
stamped or certified or otherwise shown to be exempt from stamp duty and
is accompanied by the relevant share certificate; (B) is in respect of only one
class of share; and (C) if to joint transferees, is in favour of not more than four
such transferees. Registration of a transfer of an uncertificated share may be
refused in the circumstances set out in the uncertificated securities rules (as
defined in the Articles) and where, in the case of a transfer to joint holders, the
number of joint holders to whom the uncertificated share is to be transferred
exceeds four.
Restriction on Transfer of JSOS Interests: Participants’ interests under
the JSOS are generally non-transferable during the period beginning on
acquisition of the interest and ending at the expiry of the relevant restricted
period as set out in the JSOS rules. However, interests can be transferred to a
spouse, civil partner or lineal descendant of a participant; a trust under which
no person other than the participant or their spouse, civil partner or lineal
descendant has a vested beneficial interest; or any other person approved
by the EBT Trustee. If a participant purports to transfer, assign or charge
his interest other than as set out above, the EBT Trustee may acquire the
participant’s interest for a total price of £1.
Other than as described above and on page 98 with respect to agreements
concerning the Directors’ shareholdings, the Company is not aware of any
agreements existing at the end of the period between holders of securities
that may result in restrictions on the transfer of securities or that may result
in restrictions on voting rights.
POWERS FOR THE COMPANY TO BUY BACK ITS SHARES
The Company was authorised by shareholders on 3 May 2017, at the annual
general meeting, to purchase in the market up to 10% of its issued ordinary
shares (excluding any treasury shares), subject to certain conditions laid out
in the authorising resolution. This standard authority is renewable annually;
the Directors will seek to renew this authority at the AGM. The Directors did not
exercise their authority to buy back any shares during the period.
POWERS FOR THE COMPANY TO ISSUE ITS SHARES
The Directors were granted authority at the previous annual general meeting
on 3 May 2017, to allot shares in the Company under two separate resolutions:
(i) up to one-third of the Company’s issued share capital; and (ii) up to two-
thirds of the Company’s issued share capital in connection with a rights issue.
These authorities apply until the end of the AGM (or, if earlier, until the close
of business on 2 August 2018). During the period, the Directors did not use
their power to issue shares under the authorities, but did satisfy options and
awards under the Company’s option and incentive schemes.
The Directors were also granted authority at the previous annual general
meeting on 3 May 2017 to disapply pre-emption rights. This resolution (which
is in accordance with the guidance issued by the Pre-Emption Group (the “PEG
Principles”)) sought the authority to disapply pre-emption rights over 5% of
the Company’s issued ordinary share capital.
A special resolution will be proposed at the 2018 AGM to renew the Directors’
powers to disapply pre-emption rights. The resolution will seek the authority
to disapply pre-emption rights on up to 5% of the issued share capital.
A further authority will be sought to disapply pre-emption rights for an
additional 5% for certain acquisitions or specified capital investments as
allowed by the PEG Principles. The Company will, consistent with the 2017
annual general meeting, continue to seek authority to allot shares up to two-
thirds of the Company’s issued share capital in connection with a rights issue
only. The Company believes such approach is appropriate given that it follows
guidance set by the Investment Association on the allotment of shares.
112
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 SIGNIFICANT SHAREHOLDERS
During the period the Company has received notifications, in accordance with Disclosure Guidance and Transparency Rule 5.1.2R, of interests in 3% or more of the
voting rights attaching to the Company’s issued share capital, as set out in the table below:
The London & Amsterdam Trust Company Limited
Citigroup Global Markets Limited
Tremblant Capital LP
Morgan Stanley
Number of
Ordinary
Shares/Voting
Rights
Percentage of
Issued Share
Capital
Nature of
Holding
96,489,034
63,765,764
31,334,931
26,789,375
15.31
10.11
4.97
4.25
Direct/Indirect
Direct/Indirect
Indirect
Indirect
These figures represent the number of shares and percentage held as at the date of notification to the Company.
No changes have been disclosed in accordance with Disclosure Guidance and Transparency Rule 5.1.2R in the period between 3 December 2017 and 22 January
2018 (being not more than one month prior to the date of the Notice of Meeting), except as set out in the table below:
The London & Amsterdam Trust Company Limited
Citigroup Global Markets Limited
Morgan Stanley
Number of
Ordinary
Shares/Voting
Rights
96,189,034
55,701,686
28,779,747
Percentage of
Issued Share
Capital
Nature of
Holding
15.25
8.83
4.56
Direct/Indirect
Direct/Indirect
Indirect
These figures represent the number of shares and percentage held as at the date of notification to the Company.
AMERICAN DEPOSITARY RECEIPT PROGRAM
The Company has a sponsored level 1 American Depositary Receipt (ADR) program with The Bank of New York Mellon as depositary bank. Each ADR represents
two ordinary shares of the Company. The ADRs trade on the over-the-counter (OTC) market in the United States. The CUSIP number for the ADRs is 674488101, the
ISIN is US6744881011 and the symbol is OCDDY. An ADR is a security that has been created to permit US investors to hold shares in non-US companies and, in a
level 1 programme, to trade them on the OTC market in the United States. In contrast to underlying ordinary shares, ADRs permit US investors to trade securities
denominated in US dollars in the US OTC market with US securities dealers. Were the Company to pay a dividend on its ordinary shares, ADR holders would
receive dividend payments in respect of their ADRs in US dollars.
SENIOR SECURED NOTES DUE 2024 AND IRISH STOCK EXCHANGE
On 19 June 2017 the Company priced an offering of £250 million Senior Secured Notes due 2024 (the “Notes”) at a coupon of 4% (the “Offering”) and an issue
price of 100%. The Notes are listed on the Irish Stock Exchange and trade on the Global Exchange Market which is the exchange regulated market of the Irish Stock
Exchange. The ISIN of the Notes is XS163400189. Interest on the notes is payable semi-annually in arrears. The Notes will mature on 15 June 2024.
The Company may redeem the Notes in whole or in part at any time on or after 15 June 2020, in each case, at the redemption prices set out as part of the Offering.
Prior to 15 June 2020, the Company will be entitled to redeem, at its option, all or a portion of the Notes at a redemption price equal to 100% of the principal
amount of the Notes, plus accrued and unpaid interest and additional amounts, if any, to the redemption date, plus a “make-whole” premium. Prior to 15 June
2020, the Company may, at its option, and on one or more occasions, also redeem up to 40% of the original aggregate principal amount of the Notes with the net
proceeds from certain equity offerings. Prior to 15 June 2020, the Company may redeem during each twelve-month period commencing on the Issue Date up to
10% of the aggregate principal amount of the Notes originally issued (including the aggregate principal amount of any additional Notes) at a redemption price
equal to 103% of the principal amount thereof, plus accrued and unpaid interest to the applicable redemption date. Additionally, the Company may redeem the
Notes in whole, but not in part, at a price equal to their principal amount plus accrued and unpaid interest and additional amounts, if any, upon the occurrence of
certain changes in applicable tax law.
SIGNIFICANT RELATED PARTY AGREEMENTS
There were no contracts of significance during the period between the Company or any Group company and: (1) a Director of the Company; (2) a close member of
a Director’s family; or (3) a controlling shareholder of the Company.
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CHANGE OF CONTROL
The Company does not have any agreements with any Director or employee
that would provide compensation for loss of office or employment resulting
from a takeover bid except that it should be noted that: (i) provisions of
the Company’s share schemes may cause options and awards granted
to employees under such schemes to vest on a takeover; and (ii) certain
members of senior management (not including the Directors) who were
employed prior to 2010 are entitled to a payment contingent on a change
of control of the Company or merger of the Company (irrespective of loss of
employment) as set out in his or her respective employment contract. For
further information on the change of control provisions in the Company’s
share schemes refer to the Directors’ Remuneration Report on page 89.
SIGNIFICANT AGREEMENTS
There are a number of agreements to which the Group is a party that take
effect, alter or terminate upon a change of control of the Company following a
takeover bid. Details of the significant agreements are summarised below.
Morrisons Operating Agreement: The Group has a number of commercial
arrangements with Morrisons. If certain competitors of Morrisons acquire more
than 50% of the voting rights in the Company’s shares or take control of the
composition of the Company’s Board, or acquire all or substantially all of the
Group’s business and undertakings, then Morrisons would be entitled to give
notice to terminate the operating agreement by giving not less than four (but
not more than four and a half) years’ notice.
Following Morrisons giving such a notice, Morrisons would be entitled to
procure equivalent services from third parties, the Company ceasing to be
Morrisons’ exclusive supplier of online grocery fulfilment services. Similarly,
all restrictions on the UK retail grocers to whom the Company is entitled to
provide certain services would fall away.
At the end of the four to four and a half years’ notice period, the Company
would be required to purchase Morrisons’ shares in MHE JVCo Limited (the
owner of the mechanical handling equipment in Dordon CFC).
Sourcing Agreement with Waitrose: The Company’s primary operating
subsidiary, Ocado Retail Limited (“ORL”), is party to the Sourcing Agreement with
Waitrose and its parent company, John Lewis. If certain competitors of Waitrose
or John Lewis acquire 50% or more of the shares or control of the Company’s
Board, then each of ORL, Waitrose and John Lewis may terminate the Sourcing
Agreement. In these circumstances, ORL is obliged to pay Waitrose the lower of
£40 million and 4% of the market capitalisation of the Company. This change of
control provision will cease to bind the parties if, prior to the change of control,
any party has already given a valid notice of termination.
Amended and Restated Credit Facility Agreement: The Group has an
unsecured £100 million credit facility with Barclays Bank PLC, HSBC Bank
plc, The Royal Bank of Scotland plc, Cooperative Rabobank UA and Goldman
Sachs Bank USA for general corporate and working capital purposes. If
there is a change of control of the Company, and agreeable terms cannot be
negotiated between the parties within 30 days from the date of the change
of control, any lender may cancel their commitment under the facility and all
outstanding utilisations for that lender, together with accrued interest, shall be
immediately payable.
Senior Secured Notes due 2024: In June 2017 the Company issued
£250,000,000 of senior secured notes which are listed on the Irish Stock
Exchange. Following a change of control of the Company, holders of the notes
may require it to repurchase all or part of their holding at a purchase price in
cash equal to 101% of the aggregate principal amount of their holding, plus
accrued and unpaid interest.
114
RESEARCH AND DEVELOPMENT ACTIVITIES
The Group has dedicated in-house software, logistics and engineering design
and development teams with primary focus on IT and improvements to the
customer interfaces, the CFCs and the automation equipment used in them.
Costs relating to the development of computer software are capitalised if it is
probable that the future economic benefits that are attributable to the asset
will accrue to the entity and the costs can be measured reliably. The Company
is carrying out a number of IT and engineering design and build projects with
the intention of developing new and improved automation equipment and
processes for its warehouses. Further information is contained in the Strategic
Report on pages 06 to 47.
FUTURE DEVELOPMENTS OF THE BUSINESS
The Group’s likely future developments including its strategy are described in
the Strategic Report on pages 06 to 47.
EMPLOYEES WITH DISABILITIES
Applications for employment by people with disability are always fully
considered, bearing in mind the respective aptitudes and abilities of the
applicant concerned and our ability to make reasonable adjustments to
the role and the work environment. In the event of existing employees
becoming disabled, all reasonable effort is made to ensure that their
employment within the Group continues. Training, career development and
promotion of a disabled person is, as far as possible, identical to that of an
able bodied person.
PROFIT AND DIVIDENDS
The Group’s results for the period are set out in the Consolidated Income
Statement on page 127. The Group’s profit before tax for the period amounted
to £1.0 million (2016: £12.1 million).
The Directors do not propose to pay a dividend for the period (2016: £nil).
POST-BALANCE SHEET EVENTS
There have been no material events after the balance sheet date of
3 December 2017 to the date of this Annual Report.
INDEPENDENT AUDITOR
The Company’s auditor, Deloitte, have indicated their willingness to
continue their role as the Company’s auditor. Resolutions concerning the
re-appointment of Deloitte as auditor of the Company and to authorise the
Directors to determine their remuneration will be proposed at the AGM and set
out in the Notice of Meeting. For further information on the re-appointment of
the auditors, refer to pages 68 to 69 of the Audit Committee report.
DISCLOSURE OF INFORMATION TO AUDITORS
In accordance with Section 418 of the Companies Act 2016, each Director
who held office at the date of the approval of this Directors’ Report (whose
names and functions are listed in the Board of Directors section on pages 52
and 53 of this Annual Report) confirms that, so far as he or she is aware, there
is no relevant audit information of which the Group’s auditor is unaware,
and that each Director has taken all of the steps that he or she ought to have
taken as a Director in order to make himself or herself aware of any relevant
audit information and to establish that the Group’s auditor is aware of that
information.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing this Annual Report, the Directors’
Remuneration Report and the financial statements in accordance with
applicable law and regulations.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Company law requires the Directors to prepare financial statements for
each financial year. Under that law the Directors have prepared the Group
and parent Company financial statements in accordance with International
Financial Reporting Standards (the “IFRSs”) as adopted by the European
Union. Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Company and the Group and of the result of
the Company and the Group for that period. In preparing these financial
statements, the Directors are required to:
•
select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and
prudent;
•
state whether applicable IFRSs as adopted by the European Union have
been followed, subject to any material departures disclosed and explained
in the financial statements; and
• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that
are sufficient to show and explain the Company’s transactions and disclose
with reasonable accuracy at any time the financial position of the Company
and the Group and to enable them to ensure that the financial statements
and the Directors’ Remuneration Report comply with the Companies Act and,
as regards the Group financial statements, Article 4 of the IAS Regulation.
They are also responsible for safeguarding the assets of the Company and
the Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities. The Directors are responsible for
the maintenance and integrity of the Group’s corporate website. Legislation in
the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The Directors consider that this Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company’s position and performance, business
model and strategy.
Each of the Directors who held office at the date of the approval of this Annual
Report (whose names and functions are listed on pages 116 and 117 of this
Annual Report but not including Alex Mahon) confirms, to the best of his or her
knowledge, that:
•
•
the Group financial statements, which have been prepared in accordance
with IFRSs as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group; and
the “Management Report” (as defined in the Directors’ Report on page 111)
includes a fair review of the development and performance of the business
and the position of the Group, together with a description of the principal
risks and uncertainties that it faces.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report are forward-looking
statements. Such statements are based on current expectations and
assumptions and are subject to a number of risks and uncertainties that could
cause actual events or results to differ materially from any expected future
events or results expressed or implied in these forward-looking statements.
They appear in a number of places throughout this Annual Report and include
statements regarding the intentions, beliefs or current expectations of the
Directors concerning, amongst other things, the Group’s results of operations,
financial condition, liquidity, prospects, growth, strategies and the business.
Persons receiving this report should not place undue reliance on forward-
looking statements. Unless otherwise required by applicable law, regulation
or accounting standard, the Group does not undertake to update or revise any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
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115
Our GovernanceStock Code: OCDO | www.ocadogroup.com DIRECTORS'
Report
DIRECTOR BIOGRAPHIES
Lord Rose
Chairman, 68
Appointment to the Board
11 March 2013
Committee Membership
Nomination (Chairman)
External Appointments
Chairman of Fat Face Group Limited; Chairman of Stylemania Limited, trading
as Dressipi; Non-Executive Director of RM2 International S.A.; Non-Executive
Director of Woolworths Holdings Limited, listed in South Africa; Chairman of
Majid Al Futtaim Retail based in Dubai; Non-Executive Director of Time Out
Group plc; Chairman of Zenith
Relevant Experience
Lord Rose has worked in retail for over 40 years. He has held Chief Executive
Officer positions at Argos plc, Booker plc, Arcadia Group plc and Marks
and Spencer plc. He was Chairman of Marks and Spencer plc from 2008 to
2011. Lord Rose was knighted in 2008 for services to the retail industry and
corporate social responsibility, and granted a life peerage in August 2014.
Tim Steiner, OBE
Chief Executive Officer, 48
Appointment to the Board
13 April 2000
Relevant Experience
Tim is the founding Chief Executive Officer of Ocado, which he started in 2000.
Prior to Ocado, he spent eight years at Goldman Sachs, during which time he
was based in London, Hong Kong and New York in the Fixed Income division.
Tim graduated from Manchester University in 1992 with an honours degree in
Economics, Finance and Accountancy.
Duncan Tatton-Brown
Chief Financial Officer, 52
Appointment to the Board
1 September 2012
External Appointments
Senior Independent Director and Audit Committee Chairman of Zoopla
Property Group plc
Relevant Experience
Prior to joining Ocado, Duncan was Chief Financial Officer of Fitness First plc,
and previously Group Finance Director of Kingfisher plc, one of the world’s
largest home improvement retailers. He has also been Finance Director of B&Q
plc, Chief Financial Officer of Virgin Entertainment Group and held various
senior finance positions at Burton Group Plc. Duncan holds a master’s degree
in Engineering from King’s College, Cambridge. He is also a member of the
Chartered Institute of Management Accountants.
Mark Richardson
Chief Operations Officer, 53
Appointment to the Board
3 February 2012
External Appointments
Non-Executive Director of Paneltex Limited
Relevant Experience
Mark was Head of Technology at Ocado from 2001 until he joined the Board
in 2012. He is responsible for the day-to-day running of the Ocado operation,
including CFCs, logistics developments, customer service, business planning,
engineering and technology. Mark is a Director of Paneltex Limited, a company
in which the Group holds a 25% shareholding. Prior to joining Ocado, Mark
held a number of IT positions at the John Lewis Partnership, including Head
of Selling Systems at Waitrose. He graduated from University College, London
with a degree in Physics.
Neill Abrams
Group General Counsel and Company Secretary, 53
Appointment to the Board
8 September 2000
External Appointments
Non-Executive Director of Mr Price Group Limited, listed in South Africa
Relevant Experience
Neill was on the founding team of Ocado, joining the Board in 2000. He has
Board responsibility for legal, insurance, risk management, human resources
and Corporate Responsibility. Prior to Ocado, he was a barrister in practice
at One Essex Court and spent nine years at Goldman Sachs in London in
the investment banking and legal divisions. Neill holds degrees in industrial
psychology and law from the University of the Witwatersrand in Johannesburg
and a Masters in Law from Sidney Sussex College, Cambridge. He is a member
of the Bar of England and Wales, the New York Bar and a South Africa
Advocate.
Ruth Anderson
Non-Executive Director, 64
Appointment to the Board
9 March 2010
Committee Membership
Audit (Chairman), Remuneration, Nomination
External Appointments
Non-Executive Director of Travis Perkins plc; Non-Executive Director of Coats
Group plc; Trustee and Director of The Royal Parks; Trustee of The Duke of
Edinburgh’s Award
Relevant Experience
Since retiring from KPMG eight years ago Ruth has gained non-executive
director experience at three UK listed companies and chairs the audit
committee at all three. Ruth will be retiring from the role of Non-Executive
Director at Coats Group plc in May 2018. She was a vice-chairman of the
accounting and advisory firm KPMG in the UK from 2004 to 2009 and a
member of the KPMG UK board from 1998 to 2004. She is a fellow of the
Institute of Chartered Accountants in England and Wales and a member of the
Chartered Institute of Taxation.
116
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Douglas McCallum
Non-Executive Director, 51
Appointment to the Board
3 October 2011
Committee Membership
Remuneration (Chairman), Nomination
External Appointments
Chairman of Trainline and PhotoBox
Relevant Experience
Douglas has been a pioneer of the Internet industry for a number of years,
having been at eBay Inc. from 2001 to 2014, where he led the UK business and
then turned around the pan-European business. Prior to joining eBay Inc. he
was founder and general manager of a number of businesses in the Internet,
broadcasting, software and hardware industries. Douglas read Politics,
Philosophy and Economics at the University of Oxford, and has an MBA from
Harvard Business School.
Jörn Rausing
Non-Executive Director, 57
Appointment to the Board
13 March 2003
Committee Membership
Nomination
External Appointments
Group Board Member of Tetra Laval; Board Member of Alfa Laval AB; Board Member
of DeLaval Holding AB; Member of the Board of Governors of the Museum of London
Relevant Experience
Jörn has over 25 years’ experience in corporate development and
international mergers and acquisitions. Jörn holds a degree in Business
Administration from Lund University, Sweden.
Andrew Harrison
Non-Executive Director, 47
Appointment to the Board
1 March 2016
Committee Membership
Audit, Remuneration, Nomination
External Appointments
Chairman of Carphone Warehouse Ltd; Trustee to the charity The Mix
Relevant Experience
Andrew was appointed as Chairman of Carphone Warehouse Ltd in December
2017, having previously served as Deputy Group Chief Executive of Dixons
Carphone Plc since August 2014 and prior to that as Chief Executive Officer of
Carphone Warehouse Plc. Having joined in 1995, Andrew was appointed UK CEO
of Carphone Warehouse in 2001. He led the growth of the UK business to become
the market leader in the mobile sector, and developed the fixed line strategy which
led to the creation of the TalkTalk division. Andrew was responsible for taking
Carphone Warehouse to the US in 2006, and instrumental in the creation of the
highly successful Best Buy Mobile JV. From 2009 Andrew was responsible for both
Carphone Warehouse and Phone House operations, becoming Chief Executive
Officer of the Best Buy JV in 2010. Andrew graduated with a BA in Management
Studies from the University of Leeds in 1992.
Emma Lloyd
Non-Executive Director, 48
Appointment to the Board
1 December 2016
Committee Membership
Nomination
External Appointments
Director of Corporate Development, Partnerships and Investments of Sky plc
Relevant Experience
As Sky’s Group Director of Business Development and Strategic Partnerships
Emma identifies and nurtures key strategic relationships with Sky’s technology
partners. Emma has overseen the creation of Sky’s start-up venture investment
function and US presence, leading to the investment in over 20 technology
start-ups. Emma graduated with a BA Joint Hons in Management Studies and
Geography from the University of Leeds in 1992.
The Directors’ Report is approved by the Board and signed on its behalf by
Neill Abrams
GROUP GENERAL COUNSEL AND COMPANY SECRETARY
Ocado Group plc
Registered in England and Wales
Number 07098618
6 February 2018
The Board of Directors' are found on
pages 52 and 53
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Our GovernanceStock Code: OCDO | www.ocadogroup.com 118
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 OUR
Financials (Group)
Independent Auditor's Report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
120
127
128
129
130
131
132
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119
Our FinancialsStock Code: OCDO | www.ocadogroup.com INDEPENDENT
Auditor's Report
to the members of Ocado plc
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
Opinion
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 3 December 2017 and of the
group’s profit for the 53 week period then ended;
the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by
the European Union;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied
in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements of Ocado Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise:
•
•
•
•
•
•
the consolidated income statement;
the consolidated statement of comprehensive income;
the consolidated and parent company balance sheets;
the consolidated and parent company statements of changes in equity;
the consolidated and parent company statement of cash flows; and
the related notes 1 to 5.5 to the consolidated financial statements and the related notes 1 to 5.2 of the parent company financial statements.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the
parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements
in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance
with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that were identified in the current and prior year are:
• accounting for commercial income arrangements – there is significant judgement as to the quantum and timing of income recognised
from volume rebates and there is a risk that promotional or media campaigns may not be delivered at all or in the agreed timeframe; and
•
capitalisation of internal development costs – there is significant judgement in assessing if the criteria of IAS 38 Intangible Assets are
met. In particular, we focus on the technical feasibility of projects, the probability of future economic benefits and whether assets are
impaired.
The key audit matters that were identified in the current year are:
Changes to key
audit matters from
the prior year
• accounting for Ocado Solutions contracts - the range of deliverables in these agreements is complex and requires judgement,
particularly in respect of the timing of revenue recognition.
The previous auditor’s report included two key audit matters that are not included as key audit matters in our audit report this year:
share-based payments and deferred tax asset recognition. We concluded they were not key audit matters for the following reasons:
•
for share-based payments, no new material schemes were introduced in the year and the charge for the year was consistent with the
prior period £6.9m (2016: £7.1m); and
• as set out in note 2.8 to the financial statements, Ocado has an unrecognised deferred tax asset of £40.5m (2016: £45.8m).
Management’s approach to recognition and the expected future levels of profitability was appropriately consistent with the prior year.
120
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Summary of our audit approach
Materiality
Scoping
We determined materiality to be £6m based on revenue, consistent with the approach adopted by the previous auditor.
The scope of our group audit includes all significant trading companies in the UK, whose results taken together account for over 97%
of the group’s revenue, profit after tax and net assets. All entities are managed from one central location in the UK and all audit work
is completed by the group audit team. We performed analytical procedures over the remaining trading entities, the group’s captive
insurance company in Malta and development operations in Poland and Spain.
The group audit team also audit the group’s joint venture with Wm Morrisons Supermarkets Plc (“Morrisons”).
Conclusions relating to going concern, principal risks and viability statement
GOING CONCERN
We have reviewed the directors’ statement in note 1.5 to the financial statements about whether they considered it
appropriate to adopt the going concern basis of accounting in preparing the financial statements and their identification
of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements.
We confirm that we have nothing
material to report, add or draw
attention to in respect of these
matters.
We are required to state whether we have anything material to add or draw attention to in relation to that statement
required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the
audit.
PRINCIPAL RISKS AND VIABILITY STATEMENT
Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we
obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of
the group’s and company’s ability to continue as a going concern, we are required to state whether we have anything
material to add or draw attention to in relation to:
We confirm that we have nothing
material to report, add or draw
attention to in respect of these
matters.
•
•
•
the disclosures on pages 40-41 that describe the principal risks and explain how they are being managed or mitigated;
the directors' confirmation on page 39 that they have carried out a robust assessment of the principal risks facing the
group, including those that would threaten its business model, future performance, solvency or liquidity; or
the directors’ explanation on page 39 as to how they have assessed the prospects of the group, over what period they
have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or
assumptions.
We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing
Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the
overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
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121
Our FinancialsStock Code: OCDO | www.ocadogroup.com INDEPENDENT
Auditor's Report
to the members of Ocado plc
Accounting for commercial income arrangements
Key audit matter description
The value recognised in relation to commercial income arrangements (volume rebates, promotional allowances and
media income) is significant in relation to the results for the period with the judgements applied giving rise to a risk
of potential fraud or error.
Volume rebates
There is significant judgement as to the quantum and timing of income recognised from volume rebates in particular
the specific contractual terms negotiated through the sourcing agreement with Waitrose referred to on page 114 in
the Directors’ Report.
Waitrose has supplier agreements which span the Ocado period end and which are not typically settled for several
months after the Ocado period end, as a result there is a judgement over the amount to recognise as income. This
has been identified as a Key Source of Estimation Uncertainty page 134.
Promotional allowances and media income
The volume and quantum of arrangements and real time delivery increase the risk that campaigns may not be
delivered at all or in the agreed timeframe.
Refer to page 66 (Audit Committee statement) and note 2.1 (financial statement disclosures including the related
Critical Accounting Judgements and Key Sources of Estimation Uncertainty in note 1.4).
How the scope of our audit responded
to the key audit matter
Our audit procedures included a range of tests as set out below:
Volume rebates
Our audit procedures in relation to the Waitrose year end accrual included:
• meeting Waitrose management to assess the controls and processes in place over the tracking of rebate income;
• assessing Ocado Management’s controls over their calculation of the year end rebate accrual which included
obtaining a detailed analysis of Waitrose supplier agreements, their contractual terms and previous settlements;
• obtaining a confirmation directly from Waitrose of the information used by Management in their year-end
estimate;
•
testing the accuracy of the accrual and agreeing the inputs to supporting documentation;
• agreeing the terms of a sample of agreements to underlying contracts and then to the terms used in the
calculation of the rebate accrual;
•
testing a sample of invoices to Waitrose to confirm cash settlement; and
• analysing historic trends in the settlement of the Waitrose rebate accrual and using sensitivity analysis to assess
whether the accrual was reasonable.
Promotional allowances and media income
We focused our procedures on whether an agreement for the promotional or media income recognised existed,
whether the relevant promotion or media advertising had taken place, and whether the value was recorded in the
appropriate period.
Our testing procedures included:
• assessing the controls over the process for recognising such income including the requirement for an approved
media plan or supplier agreement and detailed margin analysis on product categories highlighting unusual
variances;
• holding meetings with the principal buyers to corroborate our understanding;
• agreeing a sample of media campaigns and promotions from the promotions and media systems to the
underlying agreements; and
•
circulating a sample of independent confirmations to suppliers.
Key observations
Based on the audit procedures performed, we are satisfied that commercial income has been recognised
appropriately and reflects the substance of the arrangements.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 Capitalisation of internal development costs
Key audit matter description
How the scope of our audit responded
to the key audit matter
Ocado invests significantly in developing the software it uses to operate its retail business, to increase capacity and
efficiency of Customer Fulfilment Centres (“CFCs”), and to enhance its Ocado Solutions technology and distribution
capability.
This year Ocado has capitalised internal development costs of £42.7m (2016: £34.9m) to intangible assets and
£11.8m (FY16: £10.1m) to property, plant and equipment.
We identified this as a key audit matter due to the significant amounts invested and the potential for fraud or error
as a result of the judgement involved in assessing whether the criteria for capitalisation under IAS 38 Intangible
Assets are met.
We focused our audit procedures on the risks:
•
that capitalised costs relate to projects that are not currently technically feasible or for which the probability of
future economic benefits is not yet proven;
• of impairment of existing assets, where new technology supersedes previously capitalised projects or
inappropriate amortisation rates are used; and
• of potential for fraud or error inherent in judgements over appropriate capitalisation.
Refer to page 66 (Audit Committee statement), notes 3.1 and 3.2 to the financial statements and the disclosures in
respect of Critical Accounting Judgements and Key Sources of Estimation Uncertainty in note 1.4.
Our audit procedures included the following:
•
•
reviewing Management’s controls over their process for capitalisation, which include detailed pre-approval
papers setting out consideration of compliance with the criteria of IAS 38 Intangible assets. We also reviewed
controls over the process for assessing impairment, for example a half-yearly review of project status involving
project managers and finance;
for the most significant projects meeting with project managers responsible to gain an understanding of the
project, and to inform our assessment as to the feasibility and economic benefits of individual projects;
•
testing a sample of project additions in the year against the IAS 38 capitalisation criteria;
• performing a number of audit procedures on internal staff costs capitalised including substantive testing to
timesheets, discussions with project managers on the quantum of hours and nature of work attributable to the
project, reviewing rates per hour by reference to payroll data and the standard rate per hour of IT development
and engineering staff;
•
separately reviewing a sample of the most significant projects for indicators of impairment. This included
reviewing the profile of all project additions to assess whether any projects had been abandoned or put on hold
and held discussions with project managers to challenge whether the assets are still in use; and
• performing a series of analytic tests on the costs capitalised to identify items that in our judgement appeared
unusual, and obtaining explanations and supporting evidence from Management, for example challenging
projects with limited or negative costs capitalised in the period.
Key observations
Based on the audit procedures performed, we are satisfied that amounts capitalised appropriately reflect the
requirements of IAS 38.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com INDEPENDENT
Auditor's Report
to the members of Ocado plc
Accounting for Ocado Solutions contracts
Key audit matter description
The introduction of Segmental Reporting during the year has placed greater emphasis on the £117.7m of revenue
recognised in the Ocado Solutions business. This includes revenue being recognised for logistics and distribution
services as well as the delivery of hardware and software solutions.
How the scope of our audit responded
to the key audit matter
There are currently a limited number of Ocado Solutions contracts therefore results may be materially impacted by
the revenue recognition profile of these contracts.
The accounting for Ocado Solutions contracts, which generally have a range of deliverables, is complex and requires
judgement, particularly as to the timing of revenue recognition. Ocado Solution contracts can involve significant
upfront payments and thus there is a potential risk of misstatement (due to fraud or error) if an inappropriate
approach to revenue recognition is taken.
Refer to page 66 (Audit Committee report), note 2.2 to the consolidated financial statements on segmental reporting
and note 1.4 to the consolidated financial statements on the related Critical Accounting Judgements and Key
Sources of Estimation Uncertainty.
Our audit procedures focused on:
• understanding the substance of the contractual requirements, particularly for those contracts that involve
designing and developing customised software solutions; and
•
considering the appropriate accounting literature, notably IAS 18 Revenue and also, for those contracts that
involve designing and developing bespoke software solutions, IAS 11 Construction Contracts.
Our work included:
•
reviewing and assessing contractual agreements in order to identify the key accounting considerations such as
the identification of the deliverables within the contracts;
• meeting with the relevant commercial managers to understand the substance of the agreements;
• obtaining evidence to support transactions such as invoices for services, cash receipts, or proof of delivery for
software solutions; and
• assessing whether the accounting treatment applied by Management is in line with the appropriate accounting
standards.
Key observations
We are satisfied that revenue from the Ocado Solutions contracts has been recognised appropriately and in line with
the contractual agreements and the relevant accounting standards.
Refer to note 2.1 (page 136) in the consolidated financial statements.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our
work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group materiality
Basis for determining
materiality
Rationale for the
benchmark applied
We determined materiality for the group to be £6 million (2016: £5 million).
We determined materiality to be £6 million based on revenue. As a percentage materiality is 0.4% of revenue (2016: 0.4% of revenue).
Parent company materiality was determined as less than 0.5% of total assets.
This has been based on professional judgement and the requirement of auditing standards. We believe revenue to be the financial
measure most relevant to users of the financial statements given Ocado’s performance, in particular its levels of profitability and the
significant investment in technology.
It also provides a consistent basis to the approach taken by the previous auditor.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £300,000 (2016: £235,000), as well as differences
below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified
when assessing the overall presentation of the financial statements.
124
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 An overview of the scope of our audit
This was our first year as auditor of Ocado and as such our audit approach included an investment of time to understand the business. We reviewed the audit
work papers of the previous auditor, visited each of the three operating Customer Fulfilment Centres (“CFCs”) and met with senior management across the group
and members of the Audit Committee. We gained a detailed understanding of key processes and controls supporting the group’s transactions and assessed the
risks of material misstatement for each account balance or disclosure item. Taken together, this informed our group audit scope.
As set out in note 2.2 to the financial statements, during the year the group started to consider performance for two segments: the established online retail and
distribution business; and the Ocado Solutions business set up to exploit the group’s significant investment in technology. The first new deals for this business
were signed in the period and the results for the existing Morrisons contract were included in the segment. Our audit procedures cover both segments.
The scope of our group audit includes all significant trading companies in the UK, including the joint venture with Morrisons. The results taken together for
these entities account for over 97% of the group’s revenue, profit after tax and net assets. For the entities not subject to detailed audit work, the group’s captive
insurance company in Malta and the development operations in Poland and Spain, we tested the consolidation process and carried out analytical procedures to
confirm our conclusion there were no material misstatements in the aggregated financial information.
All entities are managed from one central location in the UK and all audit work is completed by the group audit team, led by the Senior Statutory Auditor.
Other information
The directors are responsible for the other information. The other information comprises the information included in the
annual report, other than the financial statements and our auditor’s report thereon.
We have nothing to report in
respect of these matters.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether
there is a material misstatement in the financial statements or a material misstatement of the other information. If, based
on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the
other information include where we conclude that:
•
Fair, balanced and understandable – the statement given by the directors that they consider the annual report and
financial statements taken as a whole is fair, balanced and understandable and provides the information necessary
for shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or
• Audit committee reporting – the section describing the work of the audit committee does not appropriately address
matters communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement
required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R (2) do not properly
disclose a departure from a relevant provision of the UK Corporate Governance Code.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have no realistic alternative but to do so.
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125
Our FinancialsStock Code: OCDO | www.ocadogroup.com INDEPENDENT
Auditor's Report
to the members of Ocado plc
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our
audit work, for this report, or for the opinions we have formed.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with
the financial statements; and
•
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not
identified any material misstatements in the strategic report or the directors’ report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
•
the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in
respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’
remuneration have not been made or the part of the directors’ remuneration report to be audited is not in agreement
with the accounting records and returns.
We have nothing to report in
respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board of Director’s on 3 May 2017 to audit the financial statements for the 53
weeks ending 3 December 2017 and subsequent financial periods. This is our first year as external auditor.
Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).
Mark Lee-Amies FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, UK
6 February 2018
126
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CONSOLIDATED
Income Statement
for the 53 weeks ended 3 December 2017
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Operating profit before result from joint venture and exceptional items
Share of result from joint venture
Exceptional items A
Operating profit
Finance income
Finance costs
Profit before tax
Taxation
Profit for the period
Earnings per share
Basic earnings per share
Diluted earnings per share
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
1,463.8
(959.5)
504.3
61.0
(434.2)
(117.7)
13.4
1.6
(0.3)
14.7
0.2
(13.9)
1.0
—
1.0
pence
0.16
0.16
1,271.0
(835.7)
435.3
52.9
(365.7)
(100.6)
21.9
2.1
(2.4)
21.6
0.2
(9.7)
12.1
(0.1)
12.0
pence
2.02
1.96
Notes
2.3
2.4
3.4
2.7
2.5
4.5
4.5
2.8
2.9
2.9
Non-GAAP measure: Earnings before interest, taxation, depreciation, amortisation, impairment and exceptional items A (EBITDA) A
Operating profit
Adjustments for:
Depreciation of property, plant and equipment
Amortisation expense
Impairment of property, plant and equipment
Impairment of intangible assets
Exceptional items A – impairment of property, plant and equipment
Exceptional items A – other
EBITDA A
The notes on pages 132 to 177 form part of these financial statements.
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
14.7
55.0
15.4
0.4
0.2
—
0.3
86.0
21.6
47.0
12.6
0.3
0.4
0.7
1.7
84.3
Notes
3.2
3.1
3.2
3.1
2.7
2.7
A
See Alternative Performance
Measures on page 196
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127
Our FinancialsStock Code: OCDO | www.ocadogroup.com CONSOLIDATED STATEMENT OF
Comprehensive Income
for the 53 weeks ended 3 December 2017
Profit for the period
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Cash flow hedges
— Gains arising on forward contracts
— Gains arising on hedging contracts
— Losses arising on hedging contracts
Foreign exchange gains on translation of foreign subsidiary
Other comprehensive income for the period, net of tax
Total comprehensive income for the period
The notes on pages 132 to 177 form part of these financial statements.
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
1.0
12.0
—
0.5
(0.2)
0.2
0.5
1.5
0.1
0.8
(0.2)
0.3
1.0
13.0
Notes
4.9
4.9
4.9
4.9
128
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CONSOLIDATED
Balance Sheet
as at 3 December 2017
Non-Current Assets
Intangible assets
Property, plant and equipment
Deferred tax asset
Financial assets
Investment in joint ventures
Current Assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total Assets
Current Liabilities
Trade and other payables
Borrowings
Obligations under finance leases
Derivative financial instruments
Provisions
Net Current Assets/(Liabilities)
Non-Current Liabilities
Borrowings
Obligations under finance leases
Provisions
Deferred tax liability
Net Assets
Equity
Share capital
Share premium
Treasury shares reserve
Reverse acquisition reserve
Other reserves
Retained earnings
Total Equity
The notes on pages 132 to 177 form part of these financial statements.
The Consolidated financial statements on pages 127 to 177 were authorised for issue by the Board of Directors and signed on its behalf by:
Tim Steiner
CHIEF EXECUTIVE OFFICER
Duncan Tatton-Brown
CHIEF FINANCIAL OFFICER
Ocado Group plc
Company Registration Number 07098618 (England and Wales)
31 January 2018
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3 December
2017
£m
27 November
2016
£m
Notes
3.1
3.2
2.8
3.3
3.4
3.7
3.8
4.6
3.9
3.10
4.2
4.3
4.6
3.11
4.2
4.3
3.11
2.8
4.9
4.9
4.9
4.9
4.9
112.4
453.7
14.3
3.0
51.0
634.4
42.9
66.8
0.4
150.0
260.1
894.5
(228.6)
—
(27.2)
(0.1)
(1.3)
(257.2)
2.9
(243.3)
(107.5)
(8.8)
(7.0)
(366.6)
270.7
12.6
258.4
(48.0)
(116.2)
0.7
163.2
270.7
79.7
397.3
14.2
2.6
57.1
550.9
39.1
59.4
0.3
50.9
149.7
700.6
(205.6)
(52.9)
(29.8)
(0.2)
(2.4)
(290.9)
(141.2)
(6.1)
(127.0)
(7.3)
(6.9)
(147.3)
262.4
12.6
256.9
(48.0)
(116.2)
0.2
156.9
262.4
129
Our FinancialsStock Code: OCDO | www.ocadogroup.com CONSOLIDATED STATEMENT OF
Changes in Equity
for the 53 weeks ended 3 December 2017
Balance at 29 November 2015
Profit for the period
Other comprehensive income:
Cash flow hedges
— Gains arising on forward contracts
— Gains arising on hedging contracts
— Losses arising on hedging contracts
Translation of foreign subsidiary
Total Comprehensive Income for the
Period Ended 27 November 2016
Transactions with owners:
— Issues of ordinary shares
— Share-based payments charge
— Disposal of treasury shares
Total Transactions with Owners
Balance at 27 November 2016
Profit for the period
Other comprehensive income:
Cash flow hedges
— Gains arising on hedging contracts
— Losses arising on hedging contracts
Translation of foreign subsidiary
Total Comprehensive Income for the
Period Ended 3 December 2017
Transactions with owners:
— Issues of ordinary shares
— Share-based payments charge
Total Transactions with Owners
Balance at 3 December 2017
Notes
4.9
4.9
4.9
4.9
4.9
4.10
4.9
4.9
4.9
4.9
4.9
4.10
Share
Capital
£m
12.6
—
Share
Premium
£m
258.7
—
Treasury
Shares
Reserve
£m
Reverse
Acquisition
Reserve
£m
(50.9)
—
(116.2)
—
—
—
—
—
—
—
—
—
—
12.6
—
—
—
—
—
—
—
—
12.6
—
—
—
—
—
1.1
—
(2.9)
(1.8)
256.9
—
—
—
—
—
1.5
—
1.5
258.4
—
—
—
—
—
—
—
2.9
2.9
(48.0)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(116.2)
—
—
—
—
—
—
—
—
(48.0)
—
—
—
(116.2)
Other
Reserves
£m
(0.8)
—
0.1
0.8
(0.2)
0.3
1.0
—
—
—
—
0.2
—
0.5
(0.2)
0.2
0.5
—
—
—
0.7
Retained
Earnings
£m
138.5
12.0
—
—
—
—
Total
Equity
£m
241.9
12.0
0.1
0.8
(0.2)
0.3
12.0
13.0
—
6.4
—
6.4
156.9
1.0
—
—
—
1.0
—
5.3
5.3
163.2
1.1
6.4
—
7.5
262.4
1.0
0.5
(0.2)
0.2
1.5
1.5
5.3
6.8
270.7
The notes on pages 132 to 177 form part of these financial statements.
130
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 CONSOLIDATED STATEMENT OF
Cash Flows
for the 53 weeks ended 3 December 2017
Cash Flows from Operating Activities
Profit before tax
Adjustments for:
— Depreciation, amortisation and impairment losses
— Movement in provisions
— Share of profit in joint venture
— Share-based payments charge
— Net Finance costs
Changes in working capital:
— Movement in inventories
— Movement in trade and other receivables
— Movement in trade and other payables
Cash Generated from Operations
Interest paid
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of property, plant and equipment
Purchase of intangible assets
Dividend received from joint venture
Interest received
Net Cash Flows used in Investing Activities
Cash Flows from Financing Activities
Proceeds from the issue of ordinary share capital
Proceeds from borrowings
Repayment of borrowings
Repayments of obligations under finance leases
Payment of financing fees
Settlement of cash flow hedges
Net Cash Flows from Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and cash equivalents at the beginning of the period
Cash and Cash Equivalents at the end of the Period
The notes on pages 132 to 177 form part of these financial statements.
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Notes
3.1, 3.2
3.11
3.4
2.6
4.5
3.9
53 weeks
Ended
3 December
2017
£m
52 weeks
Ended
27 November
2016
£m
1.0
71.0
0.4
(1.6)
5.3
13.7
(3.8)
(10.2)
45.1
120.9
(14.1)
106.8
(119.5)
(49.9)
7.6
0.2
(161.6)
1.5
307.5
(110.0)
(36.5)
(8.6)
—
153.9
99.1
50.9
150.0
12.1
61.0
0.6
(2.1)
6.4
9.5
(9.2)
2.5
25.2
106.0
(9.1)
96.9
(85.3)
(38.6)
8.4
0.2
(115.3)
1.1
61.3
(11.5)
(26.4)
(1.2)
0.2
23.5
5.1
45.8
50.9
131
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
SECTION 1 — BASIS OF PREPARATION
1.1 General Information
Ocado Group plc (hereafter “the Company”) is a listed company incorporated in the United Kingdom under the Companies Act 2006 (Registration number
07098618). The address of its registered office is Buildings 1 & 2 Trident Place, Mosquito Way, Hatfield, Hertfordshire, AL10 9UL. The financial statements comprise
the results of the Company, its subsidiaries and the Group’s interest in a jointly controlled entity (hereafter “the Group”). See Note 5.1. The Financial Period
represents the 53 weeks ended 3 December 2017. The prior financial period represents the 52 weeks ended 27 November 2016. The principal activities of the
Group are described in the Strategic Report on pages 06 to 47.
1.2 Basis of Preparation
The financial statements have been prepared in accordance with the Listing Rules and the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority
(where applicable), International Financial Reporting Standards (IFRS) and International Financial Reporting Standards Interpretation Committee (IFRIC) interpretations as
endorsed by the European Union (“IFRS-EU”), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies applied
are consistent with those described in the annual report and financial statements for the 52 weeks ended 27 November 2016 of Ocado Group plc.
The financial statements are presented in pounds sterling, rounded to the nearest hundred thousand unless otherwise stated. The financial statements have been prepared
under the historical cost convention, as modified by the revaluation of financial asset investments and certain financial assets and liabilities, which are held at fair value.
The Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements of the Group.
New standards, amendments and interpretations issued that are effective but not material to the Group
The Group has considered the following new standards, interpretations and amendments to published standards that are effective for the Group for the financial
year beginning 28 November 2016 and concluded that they are either not relevant to the Group or that they would not have a significant impact on the Group’s
financial statements:
Various
IFRS 10
IFRS 11
IFRS 12
IAS 1
IAS 16
IAS 28
IAS 34
IAS 38
Amendments to various IFRSs and IASs including those arising from the IASB’s annual improvements project
Consolidated financial statements (amendments)
Joint arrangements (amendments)
Disclosure in other entities (amendments)
Presentation of financial statements (amendments)
Property, plant and equipment (amendments)
Investments in associates and joint ventures (amendments)
Interim financial reporting (amendments)
Intangible assets (amendments)
Effective Date
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
New standards, amendments and interpretations not yet adopted by the Group
The following further new standards, interpretations and amendments to published standards and interpretations which are relevant to the Group have been
issued but are not effective for the financial year beginning 28 November 2016 and have not been adopted early:
IFRS 2
IFRS 9
IFRS 15
IFRS 16
IAS 12
IAS 28
Various
Share-based payments (amendments)
Financial instruments
Revenue from contracts with customers
Leases
Income taxes (amendments)
Investments in associates and joint ventures (amendments)
Amendments to various IFRSs and IASs including those arising from the IASB’s annual improvements project
Effective Date
1 January 2018
1 January 2018
1 January 2018
1 January 2019
1 January 2017
1 January 2018
Various
The following new standards are not yet effective and the impact on the Group is currently under review:
— IFRS 9 “Financial Instruments”, published in July 2014, replaces the existing guidance in IAS 39 “Financial Instruments: Recognition and Measurement”. IFRS
9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating
impairment on financial assets and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of
financial instruments from IAS 39. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9.
Our initial review of IFRS 9 has indicated that the impact of this new standard on the Group’s results is unlikely to be material.
— IFRS 15 “Revenue from Contracts with Customers” (endorsed by the EU) provides guidance on the recognition and measurement of revenue. The standard
establishes a principles-based approach for revenue recognition and is based on the concept of recognising revenue for obligations only when they are
satisfied and the control of goods or services is transferred. This applies to all contracts with customers except those in the scope of other standards. This
new standard will replace IAS 18 “Revenue” and is effective for annual periods beginning on or after 1 January 2018 unless adopted early. The Group does not
expect there to be a material impact from IFRS 15. The Group will continue to monitor the impact of IFRS 15 on new service contracts as they arise.
132
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 1.2 Basis of Preparation (continued)
— IFRS 16 “Leases” provides guidance on the classification, recognition and measurement of leases to help provide useful information to the users of financial
statements. The main aim of this standard is to ensure all leases will be reflected on the Consolidated Balance Sheet, irrespective of substance over form. The
new standard will replace IAS 17 “Leases” and is effective for annual periods beginning on or after 1 January 2019 unless adopted early. IFRS 16 is expected to
have a significant impact on the amounts recognised in the Group’s consolidated financial statements. On adoption of IFRS 16 the Group will recognise within
the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation
and interest expense. This will result in a decrease in operating expenses and an increase in finance costs with no net impact. The standard will also impact a
number of statutory measures such as operating profit, cash generated from operations, and alternative performance measures, such as EBITDA A , that are
used by the Group.
The Group's initial review of IFRS 16 indicates that the financial impact will result in an increase in finance leased assets of approximately £331 million, and a
corresponding increase in financial liabilities of £335 million, on the Consolidated Balance Sheet.
1.3 Basis of Consolidation
The consolidated Group financial statements consist of the financial statements of the Company, all entities controlled by the Company (its subsidiaries) and the
Group’s share of its interests in joint ventures.
Subsidiaries
The financial statements of subsidiaries are included in the consolidated financial statements from the date on which power over the operating and financial
decisions is obtained and cease to be consolidated from the date on which power is transferred out of the Group. Power is achieved when the Company has
the ability and right, directly or indirectly, to govern the financial and operating policies of an entity. This ability enables the Company to affect the amount of
economic benefit generated from the entity’s activities. This is evident for all of the Group’s subsidiaries listed in Note 5.1.
Ocado Polska Sp. z o.o. has a year end of 30 November 2017, as the Poland Accounting Act requires a financial year to be 12 full calendar months from the prior
year end date. Ocado Spain S.L.U. has a year end of 31 December 2017, as established in its articles of association. There was no material movement between the
reporting date of the Group and the reporting dates of these entities.
All other subsidiaries have a year end of 3 December 2017.
All intercompany balances and transactions, including recognised gains arising from inter-Group transactions, have been eliminated in full. Unrealised losses are
eliminated in the same manner as recognised gains except to the extent that they provide evidence of impairment.
Joint Ventures
The Group’s share of the results of joint ventures is included in the Consolidated Income Statement using the equity method of accounting. Investments in
joint ventures are carried in the Consolidated Balance Sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the entity, less any
impairment in value. The carrying values of the investments in joint ventures include acquired goodwill.
If the Group’s share of losses in a joint venture or associate equals or exceeds its investment in the joint venture, the Group does not recognise further losses,
unless it has incurred obligations to do so or made payments on behalf of the joint venture.
Unrealised gains arising from transactions with joint ventures are eliminated to the extent of the Group’s interest in the entity.
Accounting Policies
The principal accounting policies adopted in the preparation of these financial statements are set out in the relevant notes to these financial statements.
Accounting policies not specifically attributable to a note are set out below. These policies have been consistently applied to all the periods presented, unless
otherwise stated.
Foreign Currency Translation
Functional and Presentation Currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the
entity operates (“the functional currency”). Sterling is the Company’s functional and the Group’s presentation currency.
A
See Alternative Performance
Measures on page 196
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Our FinancialsStock Code: OCDO | www.ocadogroup.com
NOTES TO THE CONSOLIDATED
Financial Statements
1.3 Basis of Consolidation (continued)
Transactions and Balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where
items are remeasured. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation at year end exchange rates
of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Income Statement, except when deferred in equity as
qualifying cash flow hedges.
Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the Consolidated Income Statement within finance
income or finance costs. All other foreign exchange gains and losses are presented in the Consolidated Income Statement within operating profit.
Group Companies
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency
different from the presentation currency are translated into the presentation currency as follows:
a. assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
b.
income and expenses for each income statement are translated at average exchange rates (unless average is not a reasonable approximation of the cumulative
effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
c. all resulting exchange differences are recognised as a separate component of equity.
1.4 Significant Accounting Policies and Critical Estimates, Judgements and Assumptions
The preparation of the Group financial statements requires the use of certain judgements, estimates and assumptions that affect the reported amounts of
assets, liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.
Changes in accounting estimates may be necessary if there are changes in the circumstances on which the estimate was based or as a result of new information or
more experience. Significant accounting policies, key estimation uncertainties, and judgements are provided below.
Accounting policies that are significant due to the nature of business:
Area
Revenue
recognition
Policy
Revenue comprises the fair value of consideration received or receivable for the sale of goods and services. Revenue from the sale of
goods is recognised when the significant risks and rewards of ownership of the goods have been transferred, which is upon delivery
of the goods to the customer’s home for Ocado deliveries and upon transfer of goods to the courier for third party deliveries. Revenue
from the rendering of services is recognised over the period in which services are rendered.
Key estimation uncertainties:
Area
Estimate
Cost of Sales
Recognition
of deferred tax
assets
Useful economic
life and residual
value of assets
At the period end the Group is required to estimate supplier income due from annual agreements for volume rebates, which span
across the year end date. Confirmation of some amounts due is often only received three to six months after the period end. These
post year end amounts are further outlined in note 3.8 on page 151.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the
temporary differences can be utilised. Recognition, therefore, involves estimates regarding the prudent forecasting of future
taxable profits of the business and in applying an appropriate risk adjustment factor.
The assessment of the useful economic life and residual value of the Group’s assets involves a significant amount of judgement
based on historical experience with similar assets as well as anticipation of future events which may impact their useful life,
such as changes in technology. A review of useful lives took place during the year.
Note
2.1
Note
2.1
2.8
3.1/3.2
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Significant Judgements:
Area
Judgement
Intangible assets
(capitalisation
of software
costs)
Exceptional
items A
Share options
and other equity
instruments
The cost of internally generated assets is capitalised as an intangible asset where it is determined by management’s judgement
that the ability to develop the assets is technically feasible, will be completed, and that the asset will generate economic benefit
that outweighs its cost.
The Group applies judgement in identifying the significant non-recurring items of income and expense that are recognised as
exceptional to help provide an indication of the Group’s underlying business performance.
The selection of valuation models, such as the Black–Scholes model, and parameters used in order to determine the fair value of
certain share awards requires judgement.
Note
3.1
2.7
4.10
Other estimates, assumptions and judgements are applied by the Group. These include, but are not limited to, depreciation and amortisation on tangible and
intangible assets respectively, and provisions. These estimates, assumptions and judgements are also evaluated on a continual basis but are not significant.
1.5 Going Concern Basis
Accounting standards require that Directors satisfy themselves that it is reasonable for them to conclude whether it is appropriate to prepare financial statements
on the going concern basis. There has been no material uncertainty identified which would cast significant doubt upon the Group’s ability to continue using the
going concern basis of accounting for the 12 months following the approval of this Annual Report.
In assessing going concern, the Directors take into account the Group’s cash flows, solvency and liquidity positions and borrowing facilities. At the period end, the
Group had cash and cash equivalents of £150.0 million (2016: £50.9 million), external gross debt A (excluding finance leases payable to MHE JVCo) of £283.9 million
(2016: £107.0 million) and net current assets of £2.9 million (2016: liabilities of £141.2 million). During the year the Group issued £250 million of senior secured
notes with a coupon rate of 4% and renegotiated its revolving credit facility. The £100 million revolving credit facility contains typical financial covenants and runs
until June 2022. The facility has not been drawn down to date. The Group forecasts its liquidity requirements, working capital position and the maintenance of
sufficient headroom against the financial covenants in its borrowing facilities (see below). The financial position of the Group, including information on cash flow,
can be found in Our Financials on pages 118 to 191. In determining whether there are material uncertainties, the Directors consider the Group’s business activities,
together with factors that are likely to affect its future development and position (see Our Strategy on pages 22 and 23) and the Group’s principal risks and the
likely effectiveness of any mitigating actions and controls available to the Directors (see pages 40 and 41).
Further details of the Group’s considerations are provided in the Group’s Viability and Going Concern Statement on page 39.
A
See Alternative Performance
Measures on page 196
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
SECTION 2 — RESULTS FOR THE YEAR
2.1 Profit Before Tax
Accounting Policies
Revenue
The Group follows the principles of IAS 18 “Revenue”, in determining appropriate revenue recognition policies.
Revenue comprises the fair value of consideration received or receivable for the sale of goods and services. These are shown net of returns, relevant marketing
vouchers/offers and value added taxes. Relevant vouchers/offers include money-off coupons, conditional spend vouchers and offers such as buy three for the price
of two. Delivery and carrier bag receipts are included in revenue.
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have been transferred. For deliveries performed by
Ocado, recognition of revenue is upon delivery of the goods to the customer’s home. For goods which are delivered by third party couriers, revenue is recognised
when the items have been transferred to the third party for onward delivery to the customer. Income from “Ocado Smart Pass”, the Group’s discounted pre-pay
membership scheme, is recognised in the period to which it relates, on an accruals basis.
Revenue from the rendering of services is recognised over the period in which services are rendered. Initial licence contract revenues are recognised over a term
which is specific to individual customer contracts. For services, the term is the period over which services are rendered. For the licence of technology assets, the
revenue is recognised over a period consistent with the expected life of the related technology assets. Annual licence contract revenues, including associated
service and operational fees, are recognised as income in the relevant period. Ocado Solutions contracts have a range of deliverables including hosting, license
fees, logistics and distribution services as well as the delivery of hardware and software solutions.
Each contract is considered on a case by case basis. Typically revenue is recognised on a number of ways including in line with the contractual terms, in line
with the services performed, in line with the life of the assets or according to the substance of the arrangements and the nature of the solution being delivered or
another method deemed appropriate.
Cost of Sales
Cost of sales represents the cost of groceries and other products the Group sells, any associated licence fees which are driven by the volume of sales of specific
products or product groups, including the branding and sourcing fees payable to Waitrose, adjustments to inventory and charges for transportation of goods from
a supplier to a CFC.
Commercial Income
The Group continues to have agreements with suppliers whereby promotional allowances and volume-related rebates are received in connection with the
promotion or purchase of goods for resale from those suppliers. The allowances and rebates are included in cost of sales. For the 53 weeks ended 3 December
2017, promotional allowances represent 81% (2016: 82%) of commercial income, with volume-related rebates representing 19% (2016: 18%).
Promotional Allowances
Cost of sales includes monies received from suppliers in relation to the agreed funding of selected items that are sold by the Group on promotion and is
recognised once the promotional activity has taken place in the period to which it relates on an accruals basis. The estimates required for this source of income
are limited because the time periods of promotional activity, in most cases, are less than one month and the invoicing for the activity occurs on a regular basis
shortly after the promotions have ended.
Volume-Related Rebates
At the period end the Group is required to estimate supplier income due from annual agreements for volume rebates, which span across the year end date.
Estimates are required due to the fact that confirmation of some amounts due is often only received three to six months after the period end. Where estimates are
required, these are based on current performance, historical data for prior years and a review of significant supplier contracts. A material amount of this income
is received from third parties via the Group’s supply agreement with Waitrose. The estimates for this income are prepared following discussions with Waitrose
throughout the year and regularly reviewed by senior management.
Uncollected Commercial Income
Uncollected commercial income as at the balance sheet date is classified within trade and other receivables. Where commercial income has been earned, but not
yet invoiced at the balance sheet date, the amount is recorded in accrued income.
Other Income
Other income comprises the fair value of consideration received or receivable for advertising services provided by Ocado to suppliers and other third parties
on the Webshop, commission income, rental income, sublease payments receivable and amounts receivable not in the ordinary course of business. Income for
advertising services is recognised over the particular time period for which the service is provided on an accruals basis. An adjustment is made at the period end to
accrue the amount of income in relation to campaigns that may span the period end; however, such adjustments are not typically material.
Employee Benefits
The Group contributes to the personal pension plans of its staff through two pension plans: a defined contribution Group personal pension, which is administered
by Legal & General, and a defined contribution Money Purchase Scheme administered by People’s Pensions. Legacy employer contributions to the schemes
are calculated as a percentage of salary based on length of scheme membership. From October 2017 new members to the scheme are enrolled into a matching
contribution structure. Contributions are charged to the income statement in the period to which they relate.
136
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Distribution Costs
Distribution costs consist of all the costs incurred, excluding product costs, to the point of sale. In most cases, this is the customer’s home. This includes the
payroll-related expenses for the picking, dispatch and delivery of products sold to the point of sale, the cost of making those deliveries, including fuel, tolls,
maintenance of vehicles, the operating costs of the properties required for the picking, dispatch and onward delivery operations and all associated depreciation,
amortisation and impairment charges, call centre costs and payment processing charges. This includes costs incurred on behalf of Morrisons which are
subsequently recharged.
Administrative Expenses
Administrative expenses consist of all IT costs, advertising and marketing expenditure (excluding vouchers), share-based payments costs, employment costs of all
central functions, which include board, legal, finance, human resources, marketing and procurement, rent and other property-related costs for the head office, all
fees for professional services and the depreciation, amortisation and impairment associated with IT equipment, software, fixtures and fittings. Additionally, this
includes costs incurred on behalf of Morrisons which are subsequently recharged.
Exceptional Items A
The Group has adopted an income statement format which seeks to highlight significant items within the Group results for the year. The Group believes this format
is useful as it highlights one-off items, such as material set-up costs for new fulfilment warehouses, reorganisation and restructuring costs, profit or loss
on disposal of operations, and impairment of assets. Exceptional items, as disclosed on the face of the Consolidated Income Statement, are items that due to their
material and/or non-recurring nature, as determined by management, have been classified separately in order to draw them to the attention of the reader of the
financial statements and to avoid distortion of underlying performance. This facilitates comparison with prior periods to assess trends in financial performance
more readily. It is determined by management that each of these items relates to events or circumstances that are non-recurring in nature.
The Group applies judgement in identifying the significant non-recurring items of income and expense that are recognised as exceptional to help provide an
indication of the Group’s underlying business performance. Examples of items that the Group considers as exceptional include, but are not limited to, material
costs relating to the opening of a new warehouse, corporate reorganisations, head office relocation costs, and any material costs, outside of the normal course
of business as determined by management.
2.2 Segmental Reporting
The Group’s principal activities are grocery retailing and the development and monetisation of Intellectual Property (“IP”) and technology used for the online
retailing, logistics and distribution of grocery and consumer goods. The Group is not reliant on any major customer for 10% or more of its revenue.
In accordance with IFRS 8 “Operating Segments”, an operating segment is defined as a business activity whose operating results are reviewed by the chief
operating decision-maker (“CODM”) and for which discrete information is available. Operating segments are reported in a manner consistent with the internal
reporting provided to the CODM, as required by IFRS 8. The CODM, who is responsible for allocating resources and assessing performance of the operating
segments, has been identified as the Executive Directors.
During the period the Group determined it has two reportable segments: Retail and Solutions. The Retail segment provides online grocery and general
merchandise offerings to customers within the UK. The Solutions segment provides end-to-end online retail solutions to corporate customers within and outside
of the UK. In order to reconcile segment revenues A to the Group revenue and profit, a third category entitled “Other” shows unallocated costs such as central
business activities.
The Board assesses the performance of all segments on the basis of EBITDA A . EBITDA A as reported internally by segment is the key measure utilised in assessing
the performance of operating segments within the Group.
The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are subject to normal
commercial terms and market conditions. Segment results and assets include items directly attributable to a segment as well as those that can be allocated on
a reasonable basis.
Segment revenue A and EBITDA A
2016
Segment revenue A
Segment EBITDA A
2017
Segment revenue A
Segment EBITDA A
A
See Alternative Performance
Measures on page 196
Retail
£m
1,171.6
75.8
1,346.1
81.0
Solutions
£m
Other
£m
99.4
5.5
117.7
2.5
—
3.0
—
2.5
Total
£m
1,271.0
84.3
1,463.8
86.0
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Financial Statements
2.3 Gross Sales A
The reconciliation of revenue to gross sales A is as follows:
Revenue
VAT
Marketing vouchers
Gross sales A
2.4 Other Income
Other income comprises:
Media and other income
Rental income
Other income
2.5 Operating Expenses
Operating expenses include:
Cost of inventories recognised as an expense
Employment costs
Amortisation expense
Depreciation of property, plant and equipment
Impairment of property, plant and equipment, included in:
— Distribution costs
— Exceptional items A
Impairment of intangible assets, included in:
— Administrative expenses
Impairment of receivables
Research and development costs
Operating lease rentals:
— Land and buildings
— Other leases
Net foreign exchange movements
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
1,463.8
114.9
22.7
1,601.4
1,271.0
98.9
16.8
1,386.7
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
48.1
12.9
61.0
38.6
14.3
52.9
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
944.3
285.2
15.4
55.0
0.4
—
0.2
(0.2)
0.2
22.7
0.1
0.3
821.2
249.3
12.6
47.0
0.3
0.7
0.4
1.1
0.1
12.8
—
0.6
Notes
2.6
3.1
3.2
3.2
2.7, 3.2
3.1
3.8
A
See Alternative Performance
Measures on page 196
138
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 2.5 Operating Expenses (continued)
During the period, the Group obtained the following services from its auditor:
Fees payable to the Company's auditor and their associates for the audit of the Company's annual accounts
Fees payable to the Company's auditor and their associates for the audit of the Company's subsidiaries
Total audit fees
— Audit related assurance services
— Other assurance services
— Corporate finance services
Total non-audit fees
53 Weeks
Ended
3 December
2017
£’000
52 Weeks
Ended
27 November
2016
£’000
70
275
345
40
51
220
311
656
65
257
322
31
50
—
81
403
In addition to the above amounts, during the year the Group obtained finance services from its previous auditor, PricewaterhouseCoopers LLP, amounting
to £105,000.
2.6 Employee Information
Employment costs during the financial period were as follows:
Staff Costs During the Period:
Wages and salaries
Social security costs
Other pension costs
Share-based payment expense*
Total gross employment costs
Staff costs capitalised to intangible assets
Staff costs capitalised to property, plant and equipment
Total Employment Cost Expense
Average Monthly Number of Employees (including Executive Directors) by Function
Operational staff
Support staff
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
297.4
25.7
5.9
6.9
335.9
(38.9)
(11.8)
285.2
10,267
1,966
12,233
252.8
22.2
5.6
7.1
287.7
(29.8)
(8.6)
249.3
9,308
1,622
10,930
* Included in the share-based payment expense is the IFRS 2 equity-settled charge of £5.3 million (2016: £6.4 million) and an additional provision of £1.6 million (2016: £0.7 million) for
the payment of amounts due to participants of the Cash LTIP and the Beauty MIP, and for the payment of employer’s national insurance contributions on certain employee incentive
schemes.
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Financial Statements
2.7 Exceptional items A
Head office relocation costs
— Impairment of property, plant and equipment
— Other
Litigation costs
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
—
0.2
0.1
0.3
0.7
0.8
0.9
2.4
Head office relocation costs
Following the growth of the business, the Group relocated its head office. The move to the new premises was completed in stages to minimise the impact on the
business and the Group incurred dual running costs as it transitioned to the new premises. Due to the one-off nature of the head office move, these costs were
treated as exceptional.
Litigation costs
The Group has incurred litigation costs relating to the recovery of interchange fees for card transactions. The fees relating to this are material and non-recurring
and have therefore been treated as exceptional.
2.8 Taxation
Accounting Policies
The tax charge for the period comprises current and deferred tax. Tax is recognised in the Consolidated Income Statement, except to the extent that it relates to
items recognised in other comprehensive income or directly in equity, in which case the tax is also recognised in other comprehensive income or directly in equity
respectively.
Current Taxation
Current tax is the expected tax payable on the taxable income for the period, calculated using tax rates enacted by the balance sheet date. Management
periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions
where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred Taxation
Deferred tax is recognised using the balance sheet liability method on temporary differences arising between the tax base of assets and liabilities and their carrying
amount in the financial statements. Deferred tax is calculated at the tax rates that have been enacted or substantively enacted by the balance sheet date and are
expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred income tax is provided on temporary differences
arising on investments in subsidiaries, except where the timing of reversal of the temporary differences is controlled by the Group and it is probable that the
temporary difference will not reverse in the foreseeable future.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can
be utilised. Recognition, therefore, involves judgement regarding the prudent risk-adjusted forecasting of future taxable profits of the business and in applying an
appropriate risk adjustment factor. The final outcome of some of these items may give rise to material profit and loss and/or cash flow variances. At the balance
sheet date, management have forecast that the Group would generate future taxable profits against which existing tax losses could be relieved. The carrying
amount of deferred tax assets is reviewed at each balance sheet date.
Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to offset current taxation assets against current taxation
liabilities and it is the intention to settle these on a net basis.
Research and Development Expenditure Credit
The Group takes advantage of the incentives offered under the UK’s Research and Development Expenditure Credit (RDEC) regime to claim a credit for the Group’s
significant expenditure on qualifying research and development. As enacted in the Finance Act 2015, the credit due to the Group is equal to 11% of the Group’s
qualifying expenditure. The Group continues to utilise the additional benefits from the scheme in light of the Group’s commitment to its innovative technology and
software.
During the year the Group claimed a credit of £2.4 million for the 52 weeks ended 27 November 2016 (2016: £1.3 million for the 52 weeks ended 29 November
2015).
Future Changes to Tax Legislation
The Group undertakes regular reviews in order to ensure its ongoing compliance with current and future proposed changes to UK tax legislation. The Group has
undertaken a review of the Group’s activities in light of the OECD’s Base Erosion and Profit Shifting (BEPS) publications and does not foresee any significant impact
on the Group’s effective tax rate resulting from the proposed changes in the short to medium term.
A
See Alternative Performance
Measures on page 196
140
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 2.8 Taxation (continued)
Taxation — Income Statement
Recognised in the Consolidated Income Statement
Current tax:
UK corporation tax on profits of the period
Overseas corporation tax on profits of the period
Adjustments in respect of prior periods
Total Current Tax
Deferred tax:
Origination and reversal of temporary differences
Total Deferred Tax
Income Tax Expense
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
—
—
—
—
—
—
—
—
0.1
—
0.1
—
—
0.1
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the effective tax rate applicable to profits of the Group as follows:
Profit before tax
Effective tax charge at the UK tax rate of 19% (2016: 20%)
Effect of:
Utilisation of brought forward losses
Permanent differences
Temporary differences on which no deferred tax recognised
Prior year adjustments
Income Tax charge for the Period
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
29 November
2016
£m
1.0
0.2
(3.9)
2.7
1.0
—
—
12.1
2.4
(0.6)
1.7
(3.4)
—
0.1
As enacted in Finance Act 2014, the standard rate of corporation tax in the UK changed from 21% to 20% with effect from 1 April 2015. The standard rate of
corporation tax was reduced to 19% from 1 April 2017. The effective rate for the period is 19%.
Taxation — Balance Sheet
Movement in the deferred tax asset is as follows:
As at 29 November 2015
Effect of change in UK corporation tax rate
Recognised through the Consolidated Income Statement
As at 27 November 2016
Recognised through the Consolidated Income Statement
As at 3 December 2017
Tax Losses
Carried
Forward
£m
10.0
—
4.2
14.2
0.1
14.3
As enacted in the Finance Act (No.2) 2016, the main rate of corporation tax will change to 18% from 1 April 2018 and to 17% from 1 April 2020. Deferred tax has
been provided at the rate at which the deferred tax asset is expected to be utilised.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
2.8 Taxation (continued)
Movement in the unrecognised deferred tax asset is set out below:
As at 29 November 2015
Effect of change in UK corporation tax rate
Potential movement in the period unrecognised through:
— Consolidated Income Statement
As at 27 November 2016
Adjustment through submitted corporation tax returns
Potential movement in the period unrecognised through:
— Consolidated Income Statement
As at 3 December 2017
Tax Losses
Carried
Forward
£m
Accelerated
Capital
Allowances
£m
Other Short-
Term Timing
Differences
£m
41.7
(2.6)
(4.9)
34.2
(2.7)
(15.0)
16.5
5.5
16.1
(10.0)
11.6
8.8
2.3
22.7
—
—
—
—
0.2
1.1
1.3
Total
£m
47.2
(13.5)
(14.9)
45.8
6.3
(11.6)
40.5
As at 3 December 2017 the Group had approximately £183.6 million of unutilised tax losses (2016: approximately £268.6 million) available for offset against future
profits. A deferred tax asset of £14.3 million (2016: £14.2 million) has been recognised in respect of £84.0 million (2016: £78.9 million) of such losses, the recovery of
which is supported by the expected level of future profits of the Group. The recognition of the deferred tax asset is based on forecast operating results calculated
in approved business plans and a review of tax planning opportunities. Management have concluded that there is sufficient evidence for the recognition of the
deferred tax asset of £14.3 million (2016: £14.2 million).
No deferred tax asset has been recognised in respect of the remaining losses on the basis that their future economic benefit is uncertain given the unpredictability
of future profit streams. All tax losses, both recognised and unrecognised, can be carried forward indefinitely.
Movement in the recognised deferred tax liability is set out below:
As at 29 November 2015
Effect of change in UK corporation tax rate
Recognised through the Consolidated Income Statement
As at 27 November 2016
Recognised through the Consolidated Income Statement
As at 3 December 2017
£m
(2.7)
—
(4.2)
(6.9)
(0.1)
(7.0)
For the year ended 3 December 2017 the Group has recognised a deferred tax liability of £7.0 million (2016: £6.9 million). Of this amount, £4.5 million (2016: £6.9
million) is in respect of intangible assets that management assessed as qualifying for research and development corporation tax relief. The timing of the tax
deductions in respect of expenditure incurred on these assets differs from the amortisation profile of the assets giving rise to the deferred tax liability. This liability
will be unwound over the useful lives of the assets.
142
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 2.9 Earnings Per Share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in
issue during the period, excluding ordinary shares held pursuant to the Group’s JSOS on an allocated basis which are accounted for as treasury shares.
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion or vesting of all dilutive
potential shares. The Company has two classes of instruments that are potentially dilutive: share options and share interests held pursuant to the JSOS.
Basic and diluted earnings per share have been calculated as follows:
Issued shares at the beginning of the period, excluding treasury shares
Effect of share options exercised in the period
Effect of treasury shares disposed of in the period
Weighted average number of shares at the end of the period for basic earnings per share
Potentially dilutive share options and shares
Weighted average number of diluted ordinary shares
Profit attributable to the owners of the Company
Basic earnings per share
Diluted earnings per share
53 Weeks
Ended
3 December
2017
Number of
Shares (m)
52 Weeks
Ended
27 November
2016
Number of
Shares (m)
598.8
0.7
—
599.5
19.8
619.3
£m
1.0
pence
0.16
0.16
590.6
2.5
1.3
594.4
19.1
613.5
£m
12.0
pence
2.02
1.96
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
SECTION 3 — ASSETS AND LIABILITIES
3.1 Intangible Assets
Accounting Policies
Intangible Assets
Intangible assets comprise internally generated assets relating mainly to computer software and other intangible assets relating mainly to externally acquired
computer software and assets, and the right to use land. These are carried at cost less accumulated amortisation and any recognised impairment loss. Other
intangible assets such as externally acquired computer software and software licences are capitalised and amortised on a straight-line basis over their useful
lives of three to fifteen years. Costs relating to the development of computer software for internal use are capitalised once all the development phase recognition
criteria of IAS 38 “Intangible Assets” are met. When the software is available for its intended use, these costs are amortised in equal annual amounts over the
estimated useful life of the software. Amortisation and impairment of computer software or licences are charged to administrative expenses in the period in which
they arise. For the Group’s impairment policy on non-financial assets see Note 3.2.
Amortisation of intangible assets is calculated on a straight-line basis from the date on which they are brought into use, charged to administrative expenses, and is
calculated based on the useful lives indicated below:
Internally generated assets
Other intangible assets
Right to use land
3–15 years, or the lease term if shorter
3–15 years, or the lease term if shorter
The estimated useful economic life, or the lease term if shorter
Amortisation periods and methods are reviewed annually and adjusted if appropriate.
Cost Capitalisation
The cost of internally generated assets is capitalised as an intangible asset where it is determined by management’s judgement that the ability to develop the
assets is technically feasible, will be completed, and that the asset will generate economic benefit that outweighs its cost. This is in line with the recognition
criteria as outlined in IAS 38 “Intangible Assets”. Management determine whether the nature of the projects meets the recognition criteria to allow for the
capitalisation of internal costs, which include the total cost of any external products or services and labour costs directly attributable to development. During the
year management have considered whether costs in relation to the time spent on specific software projects can be capitalised. Time spent that was eligible for
capitalisation included time which was intrinsic to the development of new assets to be used or monetised by the Group, the enhancement of existing warehouse
and routing systems capabilities, or improvements to applications used by the Group’s customers.
Other development costs that do not meet the above criteria are recognised as an expense as incurred. Development costs previously recognised as an expense
are not recognised as an asset in a subsequent period.
Research expenditure is recognised as an expense as incurred. These are costs that form part of the intent of gaining new knowledge, which management
assess as not satisfying the capitalisation criteria per IAS 38 “Intangible Assets” as outlined above. Examples of research costs include, but are not limited to, the
following: salaries and benefits of employees assessing and analysing future technologies and their likely viability, and professional fees such as marketing costs
and the cost of third party consultancy.
In certain circumstances, some assets are ready for use, but are not performing as intended by management. Development costs that relate to the enhancement
or modifications of existing assets are capitalised until the asset is performing as intended by management. Management assess the capitalisation of these costs
by consulting the guidance outlined in IAS 38 “Intangible Assets” and exercise judgement in determining the qualifying costs. When unsure if the enhancement or
modification costs relate to the development of the asset or are maintenance expenditure in nature, management treat the expenditure as if it were incurred in the
research phase only in line with IAS 38 guidance.
Internally generated assets consist primarily of costs relating to intangible assets which provide economic benefit independent of other assets, and intangible
assets that are utilised in the operation of property, plant and equipment. These intangible assets are required for certain tangible assets to operate as intended
by management. Management assess each material internally generated asset addition and consider whether it is integral to the successful operation of a related
item of hardware, can be used across a number of applications and therefore whether the asset should be recognised as property, plant and equipment. If the
asset could be used on other existing or future projects it will be recognised as an intangible asset. For example, should an internally generated asset, such as the
software code to enhance the operation of existing CFC equipment, be expected to form the foundation or a substantial element of future software development,
it has been recognised as an intangible asset.
Of the internally generated assets capitalised, 22% (2016: 22%) relates to asset additions within property, plant and equipment.
Estimation of Useful Life
The charge in respect of periodic amortisation is derived by estimating an asset’s expected useful life and the expected residual value at the end of its life.
Increasing an asset’s expected life or its residual value would result in a reduced amortisation charge in the Consolidated Income Statement.
The useful life is determined by management at the time the software is acquired and brought into use and is regularly reviewed for appropriateness. For
computer software licences, the useful life represents management’s view of the expected period over which the Group will receive benefits from the software.
For unique software products developed and controlled by the Group, the life is based on historical experience with similar products as well as anticipation of
future events which may impact their useful life, such as changes in technology.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 3.1 Intangible Assets (continued)
Where the right to use land has been granted, the period over which the amortisation is charged is the lower of the estimated useful economic life and the lease
expiry date.
Cost
At 29 November 2015
Additions
Internal development costs capitalised
Disposals
At 27 November 2016
Additions
Internal development costs capitalised
At 3 December 2017
Accumulated Amortisation
At 29 November 2015
Charge for the period
Impairment
Disposals
At 27 November 2016
Charge for the period
Impairment
At 3 December 2017
Net Book Value
At 27 November 2016
At 3 December 2017
Internally
Generated
Assets
£m
Other
Intangible
Assets
£m
Total
Intangible
Assets
£m
83.0
—
34.9
(0.3)
117.6
—
42.7
160.3
(43.1)
(11.8)
(0.4)
0.3
(55.0)
(13.6)
(0.2)
(68.8)
62.6
91.5
17.6
4.9
—
(0.2)
22.3
5.6
—
27.9
(4.6)
(0.8)
—
0.2
(5.2)
(1.8)
—
(7.0)
17.1
20.9
100.6
4.9
34.9
(0.5)
139.9
5.6
42.7
188.2
(47.7)
(12.6)
(0.4)
0.5
(60.2)
(15.4)
(0.2)
(75.8)
79.7
112.4
Included within intangible assets is capital work-in-progress for internally generated assets of £15.1 million (2016: £20.0 million) and capital work-in-progress for
other intangible assets of £1.7 million (2016: £3.3 million).
The net book value of intangible assets held under finance leases is analysed below:
Cost
Accumulated amortisation
Net Book Value
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
14.4
(13.0)
1.4
14.3
(11.2)
3.1
For the 53 weeks ended 3 December 2017, internal development costs capitalised represented approximately 88% (2016: 88%) of expenditure on intangible assets
and 27% (2016: 22%) of total capital spend including property, plant and equipment.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
3.2 Property, Plant and Equipment
Accounting Policies
Property, Plant and Equipment
Property, plant and equipment excluding land are stated at cost less accumulated depreciation and any recognised impairment loss. Cost includes the original
purchase price of the asset, any costs attributable to bringing the asset to its working condition for its intended use and major spares. An item of property, plant
and equipment is recognised as an asset if it is probable that future economic benefits associated with the asset will flow to the entity, and the cost of the asset
can be measured reliably.
Property, plant and equipment represents 51% of the total asset base of the Group in 2017 (2016: 57%). The estimates and assumptions made to determine the
carrying value of property, plant and equipment and related depreciation are important to the Group’s financial position and performance. Management assess
the estimates and assumptions based on available external information and historical experience.
In determining the cost of property, plant and equipment, certain costs that relate to the intangible element of an asset are separately disclosed within Intangible
assets, Note 3.1. Management exercise judgement to review each material asset addition and consider whether the intangible asset element can be used for other
property, plant and equipment additions in the current or future years. Software written for the Group’s first CFC in Hatfield is identified as a standalone intangible
asset, because it has provided the foundation for software used in some areas of Dordon CFC, and is expected to provide part of the foundation of software used in
future centres including Andover CFC.
For more information on the Group’s policy on capitalisation of borrowings costs, see Note 4.1.
Depreciation on property, plant and equipment is charged to distribution costs and administrative expenses and is calculated based on the useful lives indicated
below:
Freehold buildings and leasehold properties
Fixtures and fittings
Plant and machinery
Motor vehicles
30 years (25 years prior to review), or the lease term if shorter
5–10 years, or the lease term if shorter
3–20 years, or the lease term if shorter
2–7 years, or the lease term if shorter
Land is held at cost and not depreciated.
Assets in the course of construction are carried at cost less any recognised impairment loss. Cost includes professional fees and other directly attributable costs.
Depreciation of these assets commences when the assets are ready for their intended use, on the same basis as other property assets.
Gains and losses on disposal are determined by comparing proceeds with the asset’s carrying amount and are recognised within operating profit.
Estimation of Useful Life
Depreciation is provided at rates estimated to write off the cost of the relevant assets less their estimated residual values by equal annual amounts over their
expected useful lives. Residual values and expected useful lives are reviewed and adjusted, if appropriate, at the end of each reporting period.
The charge in respect of periodic depreciation is derived by estimating an asset’s expected useful life and the expected residual value at the end of its life.
Increasing an asset’s expected life or its residual value would result in a reduced depreciation charge in the Consolidated Income Statement. The useful lives of the
Group’s assets are determined by management at the time the asset is acquired and reviewed at least annually for appropriateness.
Management also assess the useful lives based on historical experience with similar assets as well as anticipation of future events which may impact their useful
life, such as changes in technology. A review of useful lives took place during the year and this resulted in a revision of the useful life of a number of assets. The
revisions were accounted for prospectively as a change in accounting estimate and as a result, the depreciation charge of the Group for the current financial year
has been reduced by £1.9 million.
Impairment of Non-Financial Assets (Including Intangible Assets)
Those which do not have indefinite useful lives are subject to an annual depreciation or amortisation charge. These assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of assessing impairment, assets
are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units). The Group has identified 2 cash generating units
reflecting the Retail and Solutions segments.
Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at the end of each reporting period. When an impairment
loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior
years. A reversal of an impairment loss is recognised as income immediately.
Given the Group’s current operating structure the lowest level at which cash flows can reasonably be assessed is the Retail and Solutions segments. The Group
prepares detailed forward projections which are constantly updated and refined. Based on these projections the Board does not consider that any further
impairment of assets is required, other than that recognised in the Income Statement.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 3.2 Property, Plant and Equipment (continued)
Cost
At 29 November 2015
Additions
Internal development costs capitalised
Disposals
At 27 November 2016
Additions
Internal development costs capitalised
Disposals
At 3 December 2017
Accumulated Depreciation
At 29 November 2015
Charge for the period
Impairment
Disposals
At 27 November 2016
Charge for the period
Impairment
Disposals
At 3 December 2017
Net Book Value
At 27 November 2016
At 3 December 2017
Land and
Buildings
£m
Fixtures,
Fittings, Plant
and Machinery
£m
Motor
Vehicles
£m
80.7
27.6
—
(0.1)
108.2
10.9
—
—
119.1
(20.5)
(1.9)
—
0.1
(22.3)
(2.9)
—
—
(25.2)
85.9
93.9
403.3
63.7
10.1
(4.9)
472.2
74.5
11.8
(1.3)
557.2
(170.0)
(33.4)
(1.0)
4.9
(199.5)
(39.3)
(0.4)
1.3
(237.9)
272.7
319.3
55.2
16.6
—
(7.5)
64.3
14.6
—
(4.8)
74.1
(21.4)
(11.7)
—
7.5
(25.6)
(12.8)
—
4.8
(33.6)
38.7
40.5
Total
£m
539.2
107.9
10.1
(12.5)
644.7
100.0
11.8
(6.1)
750.4
(211.9)
(47.0)
(1.0)
12.5
(247.4)
(55.0)
(0.4)
6.1
(296.7)
397.3
453.7
Included within property, plant and equipment is capital work-in-progress for land and buildings of £37.2 million (2016: £27.4 million) and capital work-in-progress
for fixtures, fittings, plant and machinery of £61.6 million (2016: £22.9 million).
The net book value of non-current assets held under finance leases is set out below:
At 27 November 2016
Cost
Accumulated depreciation and impairment
Net book value
At 3 December 2017
Cost
Accumulated depreciation and impairment
Net Book Value
Land and
Buildings
£m
Fixtures,
Fittings, Plant
and Machinery
£m
30.9
(19.5)
11.4
31.9
(21.2)
10.7
209.8
(110.6)
99.2
211.1
(127.8)
83.3
Motor
Vehicles
£m
63.5
(25.0)
38.5
61.5
(26.2)
35.3
Property, plant and equipment with a net book value of £nil (2016: £19.0 million) has been pledged as security for the secured loans (Note 4.2).
Total
£m
304.2
(155.1)
149.1
304.5
(175.2)
129.3
147
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
3.3 Financial Assets
Accounting Policies
Financial Assets
Financial assets comprise available-for-sale financial assets, prepaid fees in relation to financing activities and contribution towards dilapidations.
Available-for-sale financial assets are those non-derivatives that are not designated as held for trading or that are not designated as “at fair value through profit
and loss”. They are included in non-current assets unless the investment matures or management intend to dispose of it within 12 months of the end of the
reporting period. Management consider that the Group’s investments fall within this category as explained below.
Prepaid fees in relation to financing activities are recognised when incurred. The prepaid fees are amortised in proportion to the drawdown and utilisation of the
underlying facility. Amortisation commenced when the underlying facility was first utilised through to the earlier of the expected refinancing date or end of the
term. Any residual of the prepaid fee which is not amortised when the facility is refinanced or repaid will be charged to the Consolidated Income Statement.
Financial assets comprise:
Unlisted equity investment — cost and net book value
Prepaid financing fees
Contribution towards dilapidation costs
Financial Assets
3 December
2017
£m
27 November
2016
£m
0.4
1.1
1.5
3.0
0.4
0.7
1.5
2.6
Investments
Available-for-sale investments are held at fair value if this can be reliably measured. If the equity instruments are not quoted in an active market and their fair
value cannot be reliably measured, the available-for-sale investment is carried at cost, less accumulated impairment. Unless the valuation falls below its original
cost, gains and losses arising from changes in fair value of available-for-sale assets are recognised directly in equity. On disposal the cumulative net gain or loss
is transferred to the statement of comprehensive income. Valuations below cost are recognised as impairment losses in the Consolidated Income Statement.
Dividends are recognised in the Consolidated Income Statement when the right to receive payment is established.
The unlisted equity investment comprises a 25% interest in Paneltex Limited (“Paneltex”), a company incorporated in the UK, which has not been treated as an
associated undertaking as the Group does not have significant influence over the company. In arriving at this decision, the Board has reviewed the conditions set out
in IAS 28 “Investments in Associates” and concluded that despite the size of its holding it is unable to participate in the financial and operating policy decisions of
Paneltex due to the position of the majority shareholder as Executive Managing Director. The relationship between the Group and the company is at arm’s length.
The shares of Paneltex are not quoted in an active market and their fair value cannot be reliably measured. As such, the investment in Paneltex is measured at cost
less accumulated impairment. The Group does not intend to dispose of this investment in the foreseeable future.
Prepaid Financing Fees
The prepaid financing fees are in relation to financing facilities entered into during the previous year. The non-current portion of prepaid finance costs relates to
amounts capitalised during the year which will not be amortised to the Consolidated Income Statement within the next 12 months. In line with the utilisation of
the facility, £1.4 million has been released from prepayments.
Contribution Towards Dilapidations
A contribution towards dilapidations is due from the former tenant of two leases entered into during the year and will be utilised when dilapidation costs are
incurred at the end of the lease.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 3.4 Investment in Joint Ventures
Accounting Policies
The Group has assessed the nature of its joint arrangement under IFRS 11 “Joint Arrangements” and determined it to be a joint venture.
The Group’s share of the results of joint ventures is included in the Consolidated Income Statement and is accounted for using the equity method of accounting.
Investments in joint ventures are carried in the Consolidated Balance Sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the
entity, less any impairment in value. On transfer of land and/or work-in-progress to joint ventures, the Group recognises only its share of any profits or losses,
namely that proportion sold outside the Group.
If the Group’s share of losses in a joint venture or associate equals or exceeds its investment in the joint venture or associate, the Group does not recognise further
losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture or associate.
Unrealised gains arising from transactions with joint ventures and associates are eliminated to the extent of the Group’s interest in the entity.
Investment in Joint Ventures
The Group has an equity interest valued at £51.0 million (2016: £57.1 million) in MHE JVCo, a joint venture company. MHE JVCo is incorporated in the UK, in which
Morrisons and Ocado Operating Limited, a subsidiary in the Group, are the sole investors. In the current year the Group received a dividend of £7.6 million from
MHE JVCo (2016: £8.4 million). The Group made no additional capital contributions into MHE JVCo.
The Group’s share of profit after tax for the year is detailed as follows:
Group share of revenue
Group share of expenses, inclusive of tax
Group Share of Profit after Tax
3 December
2017
£m
27 November
2016
£m
2.6
(1.0)
1.6
2.9
(0.8)
2.1
At the period end the Group’s share of the net assets of MHE JVCo were valued at £51.0 million (2016: £57.1 million) The principal movements during the year were
the £1.6 million Group share of profit after tax and a dividend of £7.6 million paid by MHE JVCo to the Group.
For the 53 weeks ended 3 December 2017 the entity, MHE JVCo Limited, has recognised net interest income of £5.2 million (2016: £5.8 million). Costs incurred by
MHE JVCo include depreciation of £1.9 million (2016: £1.6 million) and a tax charge of £nil (2016: £0.3 million). Material amounts held on its balance sheet as at
3 December 2017 include finance lease receivables of £94.1 million (2016: £108.7 million), £9.4 million of property, plant and equipment (2016: £8.6 million), £0.1
million of cash and cash equivalents (2016: £0.4 million) and £1.7 million of trade and other payables (2016: £5.3 million), contributing towards net assets of £102.8
million (2016: £115.5 million). Other than as a finance lessor to the Group, MHE JVCo has no other significant operations. The principal place of business is the
same as for Ocado Group plc, details of which are provided on page 198.
3.5 Business Combinations
Accounting Policies
Business Combinations
The acquisition method of accounting is used for the acquisition of subsidiaries. The cost of the acquisition is measured at the aggregate fair value of the
consideration given. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 “Business
Combinations” are recognised at their fair value at the date the Group assumes control of the acquiree.
Acquisition related costs are recognised in the Consolidated Income Statement as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement measured at fair value
at the date control is achieved. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period
adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with
relevant IFRSs.
Investments in Subsidiaries
Investments in subsidiaries held by the Company are carried at cost less accumulated impairment losses. Goodwill is the excess of consideration transferred over
the fair value of the identifiable net assets acquired.
There were no investments in new subsidiaries during the 53 weeks to 3 December 2017.
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149
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
3.6 Working Capital
Accounting Policies
Inventories
Inventories comprise goods held for resale, fuel and other consumable goods. Inventories are valued at the lower of cost and net realisable value as provided in
IAS 2 “Inventories”. Goods held for resale and consumables are valued using the weighted average cost basis. Net realisable value represents the estimated selling
price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. It also takes into account slow-moving, obsolete and
defective inventory. Fuel stocks are valued at calculated average cost. Costs include all direct expenditure and other appropriate attributable costs incurred in
bringing inventories to their present location and condition. There has been no security granted over inventory unless stated otherwise.
The Group has a mix of grocery and general merchandise items within inventory which have different characteristics. For example, grocery lines have high
inventory turnover, while non-food lines are typically held within inventory for a longer period of time and so run a higher risk of obsolescence. As inventories
are carried at the lower of cost and net realisable value, this requires the estimation of the eventual sales price of goods to customers in the future. Judgement
is applied when estimating the impact on the carrying value of inventories such as slow-moving, obsolete and defective inventory, which includes reviewing the
quantity, age and condition of inventories throughout the year.
Loans and Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in
current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current assets. The Group’s loans and
receivables are included in “Trade and other Receivables” in the Consolidated Balance Sheet.
Trade and Other Receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for
impairment.
Other receivables are non-interest bearing and are recognised initially at fair value, and subsequently at amortised cost, reduced by appropriate allowances for
estimated irrecoverable amounts.
Provision for Impairment of Trade Receivables
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according
to the original terms of the receivables.
Any provision made against an impaired receivable is recognised in the Consolidated Income Statement within administrative expenses. Subsequent recoveries of
amounts previously written off are credited against this same financial statement caption.
The outcome of an impaired receivable depends on future events which are by their nature uncertain. In assessing the likely outcome, management base their
assessment on historical experience and other factors that are believed to be reasonable in the circumstances.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank and in hand, demand deposits with banks and short-term deposits with a maturity of three months or less at the
date of acquisition. Cash at bank and in hand and short-term deposits are shown under current assets on the Consolidated Balance Sheet. The carrying amount of
these assets approximates to their fair value. They are therefore included as a component of cash and cash equivalents.
Financial Liabilities and Equity Instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any
contract that gives a residual interest in the assets of the Group after deducting all of its liabilities.
Trade and Other Payables
Trade and other payables are initially recognised at fair value and subsequently at amortised cost, using the effective interest rate method.
3.7 Inventories
Goods for resale
Consumables
Write down of inventories amounted to £nil (2016: £0.1 million) in the Consolidated Income Statement.
3 December
2017
£m
27 November
2016
£m
42.3
0.6
42.9
38.6
0.5
39.1
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 3.8 Trade and Other Receivables
Trade receivables
Less: provision for impairment of trade receivables
Net trade receivables
Other receivables
Prepayments
Accrued income
3 December
2017
£m
27 November
2016
£m
30.7
(2.6)
28.1
6.6
12.9
19.2
66.8
25.8
(2.8)
23.0
4.8
11.6
20.0
59.4
Included within trade receivables is a balance of £1.7 million (2016: £5.3 million) owed by MHE JVCo.
Included in trade receivables is £12.2 million (2016: £5.9 million) due from suppliers in relation to commercial and media income. As at 7 January 2018 £10.3
million has been received. Included in accrued income is £8.6 million (2016: £10.8 million) to be invoiced to suppliers in relation to supplier funded promotional
activity and £8.0 million (2016: £7.0 million) to be invoiced to suppliers in relation to volume-related rebate amounts. As at 7 January 2018 £7.6 million of accrued
income has been invoiced.
The ageing analysis of trade and other receivables (excluding prepayments), including the provision for impairment, is set out below:
Not past due
Past due 0–3 months
Past due 3–6 months
Past due over 6 months
3 December 2017
Gross
£m
Impairment
£m
27 November 2016
Gross
£m
Impairment
£m
50.1
4.0
0.1
2.3
56.5
—
(0.2)
(0.1)
(2.3)
(2.6)
39.5
6.9
1.5
2.7
50.6
—
(0.2)
(0.4)
(2.2)
(2.8)
The provisions account for trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at
that point, the amounts considered irrecoverable are written off against trade receivables directly. Impairment losses are included within administrative expenses
in the Consolidated Income Statement.
Trade receivables that are past due but not impaired amount to £3.8 million (2016: £4.4 million) and relate to a number of suppliers for whom there is no recent
history of default. The ageing analysis of these trade receivables is as follows:
Past due 0–3 months
Past due 3–6 months
Past due over 6 months
3.9 Cash and Cash Equivalents
Cash at bank and in hand
3 December
2017
£m
27 November
2016
£m
3.8
—
—
3.8
0.9
1.0
2.5
4.4
3 December
2017
£m
27 November
2016
£m
150.0
50.9
£3.3 million (2016: £4.0 million) of the Group’s cash and cash equivalents are held by the Group’s captive insurance company to maintain its solvency requirements.
Included in this amount are credit card payments of £25.6 million (2016: £23.3 million) received within 10 days. A further £0.8 million (2016: £0.5 million) is held by
the trustee of the Group’s employee benefit trust in relation to the Ocado Group Sharesave Scheme for employees in Poland. Therefore, these funds are restricted
and are not available to circulate within the Group on demand.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
3.10 Trade and Other Payables
Trade payables
Taxation and social security
Accruals and other payables
Deferred income
3 December
2017
£m
27 November
2016
£m
92.9
8.3
106.0
21.4
228.6
95.2
6.3
84.2
19.9
205.6
Deferred income represents the value of delivery income received under the Ocado Smart Pass scheme allocated to future periods, upfront licence fees from the
Morrisons strategic operating agreement, lease incentives, and media income from suppliers which relate to future periods.
3.11 Provisions
Accounting Policies
Provisions are recognised in line with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”. Provisions can be distinguished from other types of liability
by considering the events that give rise to the obligation and the degree of uncertainty as to the amount or timing of the liability. These are recognised in the
Consolidated Balance Sheet when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources
will be required to settle the obligation and the amount can be reliably estimated.
The amounts recognised as a provision are management’s best estimates of the expenditure to settle present obligations as at Consolidated Balance Sheet date.
The outcome depends on future events, which are by their nature uncertain. Any difference between expectations and the actual future liability will be accounted
for in the period when this is determined. In assessing the likely outcome, management base their assessment on historical experience and other factors that are
believed to be reasonable in the circumstances.
Insurance Claims
Provisions for insurance claims relate to potential motor insurance claims and potential public liability claims where accidents have occurred but a claim has yet to be
made. The provision is made based on estimates provided to Ocado by the third party manager of the Ocado Cell in Atlas Insurance PCC Limited (the “Ocado Cell”).
Dilapidations
Provisions for dilapidations are made in respect of vehicles and properties where there are obligations to return the vehicles and properties to the condition
and state they were in when the Group obtained the right to use them. These are recognised on a property-by-property basis and are based on the Group’s best
estimate of the likely committed cash outflow. Where relevant, these estimated outflows are discounted to net present value.
Employee Incentive Schemes
Provisions for employee incentive schemes relate to HMRC unapproved equity-settled schemes, the Beauty Management Incentive plan (“Beauty MIP”) and the
Cash-Based Long Term Incentive Plan (“Cash LTIP”). For all unapproved schemes and the Cash LTIP, the Group is liable to pay employer’s NIC upon allotment of
the share awards.
Unapproved schemes are the Long Term Incentive Plan (“LTIP”), the Chairman’s Share Matching Award, the Growth Incentive Plan (“GIP”) and unapproved
Executive Share Ownership Scheme (“ESOS”). For more details on these schemes, refer to note 4.10.
In 2014, the Group established the Cash LTIP in order to incentivise selected high performing employees of the Company. At the end of the three-year vesting period,
employees will be paid a cash amount equal to the notional number of awards at the prevailing share price, adjusted for the achievement of the performance conditions.
Provisions
As at 29 November 2015
Charged/(credited) to the Consolidated Income Statement
— additional provision
— unused amounts reversed
Used during the period
Unwind of discount
As at 27 November 2016
Charged/(credited) to the Consolidated Income Statement
— additional provision
— unused amounts reversed
Used during the period
As at 3 December 2017
152
Insurance
Claims
£m
Dilapidations
£m
Employee
Incentive
Schemes
£m
1.4
0.6
(0.4)
(0.4)
—
1.2
0.3
(0.4)
(0.6)
0.5
4.0
0.7
1.4
(0.1)
—
6.0
1.3
(0.8)
(0.3)
6.2
3.7
0.9
(0.2)
(1.9)
—
2.5
1.7
(0.1)
(0.7)
3.4
Total
£m
9.1
2.2
0.8
(2.4)
—
9.7
3.3
(1.3)
(1.6)
10.1
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 3.11 Provisions (continued)
Analysis of total provisions as at 27 November 2016
Current
Non-current
Analysis of total provisions as at 3 December 2017
Current
Non-current
Insurance
Claims
£m
0.4
0.8
1.2
Dilapidations
£m
1.1
4.9
6.0
Insurance
Claims
£m
Dilapidations
£m
0.1
0.4
0.5
0.4
5.8
6.2
Employee
Incentive
Schemes
£m
0.9
1.6
2.5
Employee
Incentive
Schemes
£m
0.8
2.6
3.4
Total
£m
2.4
7.3
9.7
Total
£m
1.3
8.8
10.1
Insurance Claims
The Ocado Cell uses statistical information built up over several years to estimate, as accurately as possible, the future out-turn of the total claims value incurred
but not reported as at the balance sheet date. In practice the Ocado Cell receives newly reported claims after the end of the underwriting period that have to
be allocated to the year of loss (i.e. the underwriting year of occurrence). The calculation of this provision involves estimating a number of variables, principally
the level of claims which may be received and the level of any compensation which may be payable. Uncertainty associated with these factors may result in the
ultimate liability being different from the reported provision. Although it is expected that £0.4 million claims will be settled within 12 months of the balance sheet
date, the exact timing of utilisation of the provision is uncertain.
Dilapidations
The dilapidations provision is based on the future expected repair costs required to restore the Group’s leased buildings and vehicles to their fair condition at the
end of their respective lease terms.
The Hatfield CFC lease expires in 2032, the Dordon CFC lease expires in 2038, the Andover CFC lease expires in 2092, the GMDC1 lease expires in 2022, head office
leases expire between 2019 and 2028, with leases for the spokes expiring up to 2068. Contractual amounts are due to be incurred at the end of the respective lease
terms.
Leases for vehicles run for five years, with the contractual obligation per vehicle payable at the end of the five-year lease term. If a non-contractual option to extend
individual leases for a further six months is exercised by the Group, the contractual obligation remains the same but is deferred by six months.
Employee Incentive Schemes
The provision consists of the Cash LTIP, the Beauty MIP and employer’s NIC on HMRC unapproved equity-settled schemes.
The Cash LTIP provision represents the expected cash payments to participants upon vesting of the awards. It has been calculated using various assumptions
regarding liquidity, participants’ retention and achievability of the performance conditions, and valued with reference to the year end share price. If at any point
following initial valuation any of these assumptions are revised, the charge will need to be amended accordingly. In addition to the base cost, since this is a cash
benefit, the Group will be liable to pay employer’s NIC on the value of the cash award on vesting, which is included in the above employer’s NIC provision.
To calculate the employer’s NIC provision, the applicable employer's NIC rate is applied to the number of share awards which are expected to vest, valued with
reference to the year end share price. The number of share awards expected to vest is dependent on various assumptions which are determined by management;
namely participants’ retention rate, the expectation of meeting the performance criteria, if any, and the liquidity discount. All assumptions are supported by
historical trends and internal financial forecasts, where appropriate.
For the GIP, an external valuation was carried out to determine the fair value of the awards granted (see Note 4.10 (g)).
If at any point during the life of each share award, any non-market conditions are subject to change, such as the retention rate or the likelihood of the performance
condition being met, the number of share awards likely to vest will need to be recalculated which will cause the value of the employer’s NIC provision to change
accordingly.
Once the share awards under each of the schemes have vested, the provision will be utilised when they are allocated to participants. Vesting will occur between
2017 and 2020.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
SECTION 4 — CAPITAL STRUCTURE AND FINANCING COSTS
4.1 Leases and Borrowings
Accounting Policies
Borrowings
Interest bearing bank loans and overdrafts are initially recorded at fair value, net of transaction costs. Subsequent to initial recognition, interest bearing
borrowings are stated at amortised cost with any difference between cost and redemption value being capitalised to qualifying assets or recognised in the
Consolidated Income Statement over the period of the borrowings on the effective interest rate basis.
Leased Assets
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases
are classified as operating leases. For property leases, the land and building elements are accounted for separately after determining the appropriate lease
classification.
The Group follows the guidance of IAS 17 “Leases” to determine the classification of leases as operating leases versus finance leases. The classification of a lease
as a finance lease as opposed to an operating lease will change EBITDA A as the charge made by the lessor will pass through finance charges and depreciation
will be charged on the capitalised asset. Retained earnings may also be affected depending on the relative size of the amounts apportioned to capital repayments
and depreciation. IAS 17 “Leases” requires the Group to consider splitting property leases into their component parts (i.e. land and building elements). As only the
building elements could be considered as a finance lease, management must make a judgement, based on advice from suitable experts, as to the relative value of
the land and buildings.
Finance Leases
Assets funded through finance leases are capitalised either as property, plant and equipment, or intangible assets, as appropriate, and are depreciated/ amortised
over their estimated useful lives or the lease term, whichever is shorter. The amount capitalised is the lower of the fair value of the asset or the present value
of the minimum lease payments during the lease term, measured at the inception of the lease. The resulting lease obligations are included in liabilities, net of
attributable transaction costs. Finance costs on finance leases are charged directly to the Consolidated Income Statement on the effective interest rate basis.
Operating Leases
Assets leased under operating leases are not recorded on the Consolidated Balance Sheet. Rental payments are charged directly to the Consolidated Income
Statement on a straight-line basis.
Sale and Leaseback
A sale and leaseback transaction is one where the Group sells an asset and immediately reacquires the use of the asset by entering into a lease with the buyer.
The leaseback transaction is classified as a finance lease when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group.
All other leasebacks are classified as operating leases.
For sale and finance leasebacks, any profit from the sale is deferred and amortised over the lease term. For sale and operating leasebacks, the assets are expected
to be sold at fair value, and accordingly the profit or loss from the sale is recognised immediately in the Consolidated Income Statement.
Lease Incentives
Lease incentives primarily include upfront cash payments or rent-free periods. Lease incentives are capitalised and released against the relevant rental expense
over the lease term.
4.2 Borrowings and Finance Leases
Current Liabilities
Borrowings
Obligations under finance leases
Non-Current Liabilities
Borrowings
Obligations under finance leases
Total Borrowings and Finance Leases
A
See Alternative Performance
Measures on page 196
154
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3 December
2017
£m
27 November
2016
£m
Notes
4.2
4.3
4.2
4.3
—
27.2
27.2
243.3
107.5
350.8
378.0
52.9
29.8
82.7
6.1
127.0
133.1
215.8
Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.2 Borrowings and Finance Leases (continued)
Borrowings
As at 27 November 2016
Unsecured loans
Secured loans
Total Borrowings
As at 3 December 2017
Senior secured notes
Total Borrowings
The loans outstanding at period end can be analysed as follows:
Principal amount
£m
Inception
Security
Held
None
July 2014
July 2014 Property, plant and equipment
Freehold property
Collateral
September 2015
June 2017
100.0
2.5
8.2
250.0
Disclosed as:
Current
Non-current
Less Than
One Year
£m
Between One
Year and
Two Years
£m
Between Two
Years and
Five Years
£m
Over
Five Years
£m
51.3
1.6
52.9
—
—
—
6.1
6.1
—
—
—
—
—
—
—
—
—
—
243.3
243.3
Total
£m
51.3
7.7
59.0
243.3
243.3
Carrying
Amount as at
3 December
2017
£m
Carrying
Amount as at
27 November
2016
£m
Final
Payment
Due
Instalment
Frequency
Current
Interest Rate
LIBOR + 1.5%
9.12%1
LIBOR + 1.5%
June 20222
Monthly
Monthly
July 2017
Quarterly September 2018
June 2024
4% Semi-annually
—
—
—
243.3
243.3
—
243.3
243.3
51.3
0.5
7.2
—
59.0
52.9
6.1
59.0
1. Calculated as the effective interest rate, the calculation of which includes an optional balloon payment at the end of the term
2. Date of expiry of facility
In the current year, the unsecured £210 million revolving facility was reduced to £100 million and extended by three years to 2022. As at 3 December 2017 the
facility has not been utilised. Senior secured notes were issued in June 2017, raising £250 million; this is shown net of transaction fees. The senior secured notes
are secured by charges over the issued share capital of the subsidiary undertakings that acted as guarantors for the notes.
The Group regularly reviews its financing arrangements. The revolving facility and the senior secured notes contain typical restrictions concerning dividend
payments and additional debt and leases.
4.3 Obligations Under Finance Leases
Obligations under finance leases due:
Within one year
Between one and two years
Between two and five years
After five years
Total obligations under finance leases
3 December
2017
£m
27 November
2016
£m
27.2
24.6
65.3
17.6
134.7
29.8
25.8
66.4
34.8
156.8
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NOTES TO THE CONSOLIDATED
Financial Statements
4.3 Obligations Under Finance Leases (continued)
External obligations under finance leases are £40.6 million (2016: £48.1 million) excluding £94.1 million (2016: £108.7 million) payable to MHE JVCo, a joint venture
company.
Minimum lease payments due:
Within one year
Between one and two years
Between two and five years
After five years
Less: future finance charges
Present value of finance lease liabilities
Disclosed as:
Current
Non-current
3 December
2017
£m
27 November
2016
£m
33.6
29.3
72.7
18.3
153.9
(19.2)
134.7
27.2
107.5
134.7
38.4
31.7
76.9
36.8
183.8
(27.0)
156.8
29.8
127.0
156.8
The existing finance lease arrangements entered into by the Group contain no restrictions concerning dividends, additional debt and further leasing. Furthermore,
no material leasing arrangements exist relating to contingent rent payable, renewal or purchase options and escalation clauses.
4.4 Analysis of Net Debt A
Net debt
Current Assets
Cash and cash equivalents
Current Liabilities
Borrowings
Obligations under finance leases
Non-Current Liabilities
Borrowings
Obligations under finance leases
Total Net Debt A
3 December
2017
£m
27 November
2016
£m
Notes
3.9
4.2
4.3
4.2
4.3
150.0
—
(27.2)
(27.2)
(243.3)
(107.5)
(350.8)
(228.0)
50.9
(52.9)
(29.8)
(82.7)
(6.1)
(127.0)
(133.1)
(164.9)
Net debt is £133.9 million (2016: £56.2 million), excluding finance lease obligations of £94.1 million (2016: £108.7 million) payable to MHE JVCo, a joint venture
company. £4.1 million (2016: £4.5 million) of the Group’s cash and cash equivalents are considered to be restricted and are not available to circulate within the
Group on demand. For more information see Note 3.9.
Reconciliation of Net Cash Flow to Movement in Net Debt A
Net increase in cash and cash equivalents
Net (increase) in debt and lease financing
Non-cash movements:
— Assets acquired under finance lease
Movement in Net Debt A in the Period
Opening net debt A
Closing Net Debt A
A
See Alternative Performance
Measures on page 196
156
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3 December
2017
£m
27 November
2016
£m
99.1
(147.7)
(14.5)
(63.1)
(164.9)
(228.0)
5.1
(23.4)
(19.6)
(37.9)
(127.0)
(164.9)
Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.5 Finance Income and Costs
Accounting Policies
Borrowing Costs
Borrowing costs which are directly attributable to the acquisition or construction of qualifying assets are capitalisable. They are defined as the borrowing costs
that would have been avoided if the expenditure on the qualifying asset had not been made. All other borrowing costs which are not capitalised are charged to
finance costs, using the effective interest rate method.
Finance Income and Costs
Interest income is accounted for on an accruals basis using the effective interest method. Finance costs comprise obligations on finance leases and borrowings
and are recognised in the period in which they fall due.
Interest on cash balances
Finance Income
Borrowing costs
— Obligations under finance leases
— Borrowings
Finance Costs
Net Finance Costs
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
0.2
0.2
(8.2)
(5.7)
(13.9)
(13.7)
0.2
0.2
(9.4)
(0.3)
(9.7)
(9.5)
The carrying value of the finance income and costs approximates their fair value.
4.6 Derivative Financial Instruments
Accounting Policies
Derivative Financial Instruments
Derivative financial instruments are initially recognised at fair value on the contract date and are subsequently measured at their fair value at each balance sheet
date. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of
the item being hedged. At 3 December 2017 and at 27 November 2016, the Group’s derivative financial instruments consisted of commodity swap contracts which
are designated as cash flow hedges of highly probable transactions.
The Group documents at the inception of the hedge the relationship between hedging instruments and hedged items, the risk management objectives and
strategy and its assessment of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows
of hedged items.
This assessment is performed retrospectively at each financial reporting period. Movements on the hedging reserve within shareholders’ equity are shown in the
Consolidated statement of comprehensive income. The full fair value of hedging derivatives is classified as current when the remaining maturity of the hedged
item is less than 12 months.
Cash Flow Hedging
The effective portion of changes in the fair value of derivatives that are designated as cash flow hedges and qualify for hedge accounting is recognised in other
comprehensive income. Amounts accumulated through other comprehensive income are recycled in the Consolidated Income Statement in the periods when the
hedged item affects profit or loss. When the hedged forecast transaction results in the recognition of property, plant and equipment, the gains or losses previously
deferred in equity are included in the initial cost of the asset and are ultimately recognised in profit or loss within the depreciation expense. During the period all of
the Group’s cash flow hedges were effective and there is therefore no ineffective portion recognised in profit or loss.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.6 Derivative Financial Instruments (continued)
Commodity Swap Contracts
The notional principal amounts of the outstanding commodity swap contracts at 3 December 2017 were £6.9 million (2016: £4.8 million). The hedged highly
probable forecast transactions are expected to occur at various dates during the next 12 months. Cumulative net gains of £0.3 million have been recognised in the
hedging reserve within other comprehensive income. These gains and losses are recognised in the Consolidated Income Statement in periods during which the
hedged forecast transaction affects the Consolidated Income Statement.
Commodity swap contracts
Derivative asset
Derivative liability
3 December
2017
£m
27 November
2016
£m
0.4
(0.1)
0.3
0.3
(0.2)
0.1
4.7 Financial Instruments
Accounting Policies
Financial assets and financial liabilities are recognised on the Consolidated Balance Sheet when the Group becomes a party to the contractual provisions of the
instrument.
The Group classifies its financial instruments in the following categories:
• available-for-sale;
•
loans and receivables;
• other financial liabilities at amortised cost; and
•
financial assets and liabilities at fair value through profit or loss.
The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determine the classification of their financial
instruments at initial recognition or in certain circumstances on modification.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount reported in the Consolidated Balance Sheet when there is a legally enforceable right to offset the
recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Impairment of Financial Assets
Assets Carried at Amortised Cost
The Group assesses whether there is objective evidence that a financial asset is impaired at the end of each reporting period. A financial asset is impaired and an
impairment loss recognised if there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and the
loss event has an impact on the estimated future cash flows of the financial assets that can be reliably estimated. The criteria that the Group uses to determine
that there is objective evidence of an impairment loss include but are not limited to:
•
financial difficulty indicators;
• breach of contract such as missed payments;
•
fraud;
• bankruptcy; and
• disappearance of an active market.
The amount of the loss is measured as the difference between the asset’s carrying value and the present value of estimated future cash flows discounted at the
financial asset’s original effective interest rate. The asset’s carrying value is reduced and the loss recognised in the Consolidated Income Statement.
If, in a subsequent period, the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised,
the reversal of the previously recognised impairment loss is recognised in the Consolidated Income Statement.
158
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.7 Financial Instruments (continued)
Available-For-Sale Financial Assets
Equity investments classified as available-for-sale and held at cost are reviewed annually to identify if an impairment loss has occurred. The amount of the
impairment loss is measured as the difference between the carrying value of the financial asset and the present value of estimated future cash flows discounted
at the current market rate of return for a similar financial asset. Impairment losses recognised in the Consolidated Income Statement on equity investments are
not reversed.
Fair Value of Financial Instruments
Financial instruments carried at fair value in the Consolidated Balance Sheet comprise the derivative assets and liabilities — see Note 4.6. The Group uses the
following hierarchy for determining and disclosing the fair value of these financial instruments:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);
•
•
Inputs other than quoted prices that are observable for the asset and liability, either directly or indirectly (level 2);
Inputs for the assets or liabilities that are not based on observable market data (level 3).
The Group’s derivative assets and liabilities other than the senior secured notes are all classified as level 2. The senior secured notes are classified as level 1.
Set out below is a comparison by category of carrying values and fair values of all financial instruments that are included in the financial statements:
Financial Assets
Cash and cash equivalents
Trade receivables
Other receivables
Non-current financial assets
Derivative assets
Total financial assets
Financial Liabilities
Trade payables
Other payables
Senior secured notes
Other borrowings
Finance lease obligations
Derivative liabilities
Total financial liabilities
3 December 2017
27 November 2016
Carrying Value
£’000
Notes
Fair Value
£’000
Carrying Value
£’000
Fair Value
£’000
3.9
3.8
3.8
3.3
4.6
3.10
3.10
4.2
4.2
4.3
4.6
150.0
28.1
38.7
2.8
0.4
220.0
(92.9)
(135.7)
(243.3)
—
(134.7)
(0.1)
(606.7)
150.0
28.1
38.7
2.8
0.4
220.0
(92.9)
(135.7)
(240.9)
—
(134.7)
(0.1)
(604.3)
50.9
23.0
36.4
2.6
0.3
113.2
(95.2)
(110.4)
—
(59.0)
(156.8)
(0.2)
(421.6)
50.9
23.0
36.4
2.6
0.3
113.2
(95.2)
(110.4)
—
(59.0)
(156.8)
(0.2)
(421.6)
The derivative assets and liabilities relate to forward commodity swap contracts.
The Group’s only available-for-sale financial asset consists of an unlisted equity investment of which the fair value cannot be reliably determined, and which is
therefore measured at cost. There has been no movement in this investment during the period.
The fair values of cash and cash equivalents, receivables, payables and accruals of a maturity of less than one financial period are assumed to approximate to their
carrying values but for completeness are included in this analysis.
The fair value of the senior secured notes is determined based on the quoted price in the active market. The carrying value in the table above is stated after
deduction of issue costs of £6.7 million.
The interest rate used to discount borrowings is based on a LIBOR plus margin measure blended for the type of security offered and was calculated as 1.8%
(2016: 2.1%).
The fair values of all other financial assets and liabilities have been calculated by discounting the expected future cash flows at prevailing market interest rates.
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159
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.7 Financial Instruments (continued)
The Group has categorised its financial instruments as follows:
Available-
for-Sale
£m
Loans and
Receivables
£m
Notes
Financial
Liabilities at
Fair Value
Through
Profit and
Loss
£m
Financial
Liabilities at
Amortised
Cost
£m
As at 27 November 2016
Financial Assets as per the Consolidated Balance Sheet
Cash and cash equivalents
Trade and other receivables
Financial assets
Derivative assets
Total
Financial Liabilities as per the Consolidated Balance Sheet
Trade payables
Other payables
Borrowings
Obligations under finance leases
Derivative liabilities
Total
3.9
3.8
3.3
3.10
3.10
4.2
4.3
4.6
—
—
2.6
—
2.6
—
—
—
—
—
—
50.9
59.4
—
—
110.3
—
—
—
—
—
—
—
—
—
—
—
(95.2)
(110.4)
(59.0)
(156.8)
—
(421.4)
—
—
—
0.3
0.3
—
—
—
—
(0.2)
(0.2)
Available-
for-Sale
£m
Loans and
Receivables
£m
Notes
Financial
Liabilities at
Fair Value
Through
Profit and
Loss
£m
Financial
Liabilities at
Amortised
Cost
£m
As at 3 December 2017
Financial Assets as per the Consolidated Balance Sheet
Cash and cash equivalents
Trade and other receivables
Financial assets
Derivative assets
Total
Financial Liabilities as per the Consolidated Balance Sheet
Trade payables
Other payables
Senior secured notes
Obligations under finance leases
Derivative liabilities
Total
3.9
3.8
3.3
4.6
3.10
3.10
4.2
4.3
4.6
—
—
2.8
—
2.8
—
—
—
—
—
—
150.0
66.8
—
—
216.8
—
—
—
—
—
—
—
—
—
—
—
(92.9)
(135.7)
(243.3)
(134.7)
—
(606.6)
—
—
—
0.4
0.4
—
—
—
—
(0.1)
(0.1)
Total
£m
50.9
59.4
2.6
0.3
113.2
(95.2)
(110.4)
(59.0)
(156.8)
(0.2)
(421.6)
Total
£m
150.0
66.8
2.8
0.4
220.0
(92.9)
(135.7)
(243.3)
(134.7)
(0.1)
(606.7)
160
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.8 Financial Risk Management
Overview
The Group’s financial instruments comprise trade receivables and payables, borrowings and finance leases, cash and cash equivalents, and derivatives. The main
financial risks faced by the Group relate to the risk of default by counterparties following financial transactions, the availability of funds for the Group to meet its
obligations as they fall due and fluctuations in interest and foreign exchange rates.
The management of these risks is set out below.
Credit Risk
The Group’s exposures to credit risk arise from holdings of cash and cash equivalents, trade and other receivables (excluding prepayments) and derivative assets.
The carrying value of these financial assets, as set out in Note 4.7, represents the maximum credit exposure. No collateral is held as security against these assets.
Cash and Cash Equivalents
The Group’s exposure to credit risk on cash and cash equivalents is managed by investing in banks and financial institutions with strong credit ratings and by
regular review of counterparty risk.
Trade and Other Receivables
Trade and other receivables at the period end comprise mainly monies due from suppliers, which are considered of a good credit quality, as well as VAT
receivables. The Group provides for doubtful receivables in respect of monies due from suppliers.
The Group has very low retail credit risk due to transactions being principally of a high volume, low value and short maturity. The Group has effective controls over
this area. The Group has allowed for doubtful receivables in respect of consumer sales by reviewing the ageing profile and, based on prior experience, assessing
the recoverability of overdue balances.
Movements in the allowance for the impairment of trade and other receivables are as follows:
At the beginning of the period
Provision for impairment of receivables
Uncollectable amounts written off
Recovery of amounts previously provided
At the end of the period
3 December
2017
£m
27 November
2016
£m
Notes
(2.8)
(0.3)
(0.7)
1.2
(2.6)
(1.7)
(1.1)
(0.8)
0.8
(2.8)
3.8
The Group has adequate cash resources to manage the short-term working capital needs of the business. In the current year, the unsecured £210 million revolving
facility was reduced to £100 million and extended by three years to 2022. As at 3 December 2017 the facility has not been utilised. Senior secured notes were issued
in June 2017, raising £250 million. The Group regularly reviews its financing arrangements. For further details of the review please refer to the Group’s Viability
Statement on page 39.
The Group monitors its liquidity requirements to ensure it has sufficient cash to meet operational needs. For further details see Note 4.11.
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161
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.8 Financial Risk Management (continued)
The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date at the
Balance Sheet date. The amounts disclosed in the table are the carrying values and undiscounted contractual cash flows.
Financial Liabilities
Trade payables
Other payables
Borrowings
Obligations under finance leases
Derivative liabilities
27 November 2016
Financial Liabilities
Trade payables
Other payables
Senior secured notes
Obligations under finance leases
Derivative liabilities
3 December 2017
Notes
3.10
3.10
4.2
4.3
4.6
Notes
3.10
3.10
4.2
4.3
4.6
Carrying
Value
£m
Contractual
Cash Flows
£m
1 Year or
Less
£m
(95.2)
(110.4)
(59.0)
(156.8)
(0.2)
(421.6)
(95.2)
(110.4)
(59.0)
(183.8)
(0.2)
(448.6)
(95.2)
(110.4)
(52.9)
(38.4)
(0.2)
(297.1)
Carrying
Value
£m
Contractual
Cash Flows
£m
1 Year or
Less
£m
(92.9)
(135.7)
(243.3)
(134.7)
(0.1)
(606.7)
(92.9)
(135.7)
(243.3)
(153.9)
(0.1)
(625.9)
(92.9)
(135.7)
—
(33.6)
(0.1)
(262.3)
1–2
Years
£m
—
—
(6.1)
(31.7)
—
(37.8)
1–2
Years
£m
—
—
—
(29.3)
—
(29.3)
2–5
Years
£m
—
—
—
(76.9)
—
(76.9)
2–5
Years
£m
—
—
—
(72.7)
—
(72.7)
More Than
5 Years
£m
—
—
—
(36.8)
—
(36.8)
More Than
5 Years
£m
—
—
(243.3)
(18.3)
—
(261.6)
Market Risk
Currency Risk
The Group has foreign currency exposure in relation to its foreign currency trade payables and a portion of its cash and cash equivalents.
Foreign currency trade payables arise principally on purchases of plant and equipment, primarily in relation to the euro, Polish zloty and US dollar. Bank accounts
are maintained in these foreign currencies in order to minimise the Group’s exposure to fluctuations in the currency relating to current and future purchases of
plant and equipment.
The Group’s exposure to currency risk is based on the following amounts:
Cash and cash equivalents – EUR
Cash and cash equivalents – PLN
Trade payables at period end – EUR
Trade payables at period end – PLN
Trade payables at period end – USD
3 December
2017
£m
27 November
2016
£m
—
3.4
(0.1)
(0.1)
(1.0)
2.2
0.2
2.0
(0.2)
(0.1)
(0.1)
1.8
The table below shows the Group’s sensitivity to changes in foreign exchange rates on its financial instruments denominated in foreign currencies.
10% appreciation of the above foreign currencies
10% depreciation of the above foreign currencies
3 December 2017
27 November 2016
Increase/
(Decrease) in
Income
£m
Increase/
(Decrease) in
Equity
£m
Increase/
(Decrease) in
Income
£m
Increase/
(Decrease) in
Equity
£m
0.2
(0.2)
—
—
0.2
(0.2)
—
—
A movement of the euro, as indicated, against sterling at 3 December 2017 would have increased/(decreased) equity and profit or loss by the amounts detailed
above. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the period. The
analysis assumes that all other variables remain constant.
162
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.8 Financial Risk Management (continued)
Interest Rate Risk
The Group is exposed to interest rate risk on its floating rate interest bearing borrowings and floating rate cash and cash equivalents. The Group’s interest rate
risk policy seeks to minimise finance charges and volatility by structuring the interest rate profile into a diversified portfolio of fixed rate and floating rate financial
assets and liabilities. Interest rate risk on floating rate interest bearing borrowings is not significant.
At the balance sheet date, the interest rate profile of the Group’s interest bearing financial instruments was:
Fixed Rate Instruments
Financial assets
Financial liabilities
Variable Rate Instruments
Financial assets
Financial liabilities
3 December
2017
£m
27 November
2016
£m
149.5
(376.7)
0.5
—
50.7
(156.8)
0.2
(59.0)
Sensitivity Analysis
An increase of 100 basis points (1.0%) in interest rates would impact equity and profit or loss by the amounts shown below. A rate of 100 basis points was assessed
as being appropriate, considering the current short-term interest rate outlook. The calculation applies the increase to average floating rate interest bearing
borrowings and cash and cash equivalents existing during the period. This analysis assumes that all other variables remain constant and considers the effect
on financial instruments with variable interest rates.
Equity
Result
Income
Loss
3 December
2017
£m
27 November
2016
£m
—
(0.2)
—
(0.6)
4.9 Share Capital and Reserves
Accounting Policy
Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.
Share Capital and Reserves
As at 3 December 2017, the number of ordinary shares available for issue under the Block Listing Facilities was 12,083,504 (2016: 13,318,184). These ordinary
shares will only be issued and allotted when the shares under the relevant share incentive plan have vested or the share options under the Group’s executive share
ownership scheme and non-employee share options and Sharesave schemes have been exercised. They are therefore not included in the total number of ordinary
shares outstanding below.
The movements in the called up share capital and share premium accounts are set out below:
At 29 November 2015
Issues of ordinary shares
Reacquisition of interest in treasury shares
Allotted in respect of share option schemes
At 27 November 2016
Issues of ordinary shares
Allotted in respect of share option schemes
At 3 December 2017
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Ordinary
Shares
Number of
Shares
(million)
625.4
3.4
—
0.4
629.2
1.1
0.4
630.7
Ordinary
Shares
£m
Share
Premium
£m
12.6
—
—
—
12.6
—
—
12.6
258.7
0.6
(2.9)
0.5
256.9
0.9
0.6
258.4
163
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.9 Share Capital and Reserves (continued)
Included in the total number of ordinary shares outstanding above are 32,803,390 (2016: 32, 830, 613) ordinary shares held by the Group’s employee benefit
trust (see Note 4.10(b)). The ordinary shares held by the trustee of the Group’s employee benefit trust pursuant to the JSOS are treated as treasury shares in the
Consolidated Balance Sheet in accordance with IAS 32 ‘‘Financial Instruments: Presentation’’. These ordinary shares have voting rights but these have been waived
by the trustee (although the trustee may vote in respect of shares that have vested and remain in the trust). The number of allotted, called up and fully paid shares,
excluding treasury shares, at the end of each period differs from that used in the basic earnings per share calculation in Note 2.9 as basic earnings per share is
calculated using the weighted average number of ordinary shares in issue during the period, excluding treasury shares.
The movements in reserves other than share premium are set out below:
At 29 November 2015
Movement on derivative financial instruments
Disposal of treasury shares
Reacquisition of interests in treasury shares
At 27 November 2016
Movement on derivative financial instruments
Translation of foreign subsidiary
At 3 December 2017
Notes
4.9(b)
4.9(a)
4.9(a)
4.9(b)
Treasury
Shares
Reserve
£m
Reverse
Acquisition
Reserve
£m
Fair Value
Reserve
£m
(50.9)
—
—
2.9
(48.0)
—
—
(48.0)
(116.2)
—
—
—
(116.2)
—
—
(116.2)
(0.8)
0.7
0.3
—
0.2
0.3
0.2
0.7
(a) Treasury Shares Reserve
This reserve arose when the Group issued equity share capital under its JSOS, which is held in trust by the trustee of the Group’s employee benefit trust. Treasury
shares cease to be accounted for as such when they are sold outside the Group or the interest is transferred in full to the participant pursuant to the terms of the
JSOS. Participant interests in unexercised shares held by participants are not included in the calculation of treasury shares; unvested interests of leavers which
have been reacquired by the Group’s employee benefit trust during the period are not accounted for as treasury shares. See Note 4.10(b) for more information on
the JSOS.
The disposal of treasury shares in the prior period relates to the utilisation of 1,915,040 JSOS interests to part-satisfy the 2013 LTIP award which vested in the
period. These interests, which were held by the Employee Benefit Trust on an unallocated basis, were held at a cost of £1.50 per interest. A further 2,500,000 shares
were issued at nominal value to satisfy the award. As the 2013 LTIP award was a nil cost share award, there was no consideration received from the participants in
return for these interests and hence a loss on disposal of £2.9 million was realised on the transaction. This loss was transferred to the share premium account on
consolidation.
(b) Other Reserves
The fair value reserve comprises gains and losses on movements in the Group’s cash flow hedges, which consist of commodity swaps and foreign currency hedges.
The acquisition by the Company of the entire issued share capital in 2010 of Ocado Limited was accounted for as a reverse acquisition under IFRS 3 (revised).
Consequently, the previously recognised book values and assets and liabilities have been retained and the consolidated financial information for the period to
3 December 2017 has been presented as if the Company had always been the parent company of the Group.
164
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.10 Share Options and Other Equity Instruments
Accounting Policies
Employee Benefits
Employees (including Directors) of the Group receive part of their remuneration in the form of share-based payments, whereby, depending on the scheme,
employees render services in exchange for rights over shares (“equity-settled transactions”) or entitlement to a future cash payment (“cash-settled transactions”).
The cost of equity-settled transactions with employees is measured, where appropriate, with reference to the fair value at the date on which they are granted.
Where options need to be valued an appropriate valuation model is applied. The expected life used in the model has been adjusted, based on management’s best
estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The cost of cash-settled transactions is measured with reference to the fair value of the liability, which is taken to be the closing price of the Company’s shares.
Until the liability is settled it is remeasured at the end of each reporting period and at the date of settlement, with any changes in the fair value being recognised
in the Consolidated Income Statement for the period. For more details please refer to Note 3.11 Provisions – Employee Incentive Schemes.
The cost of equity-settled transactions is recognised, along with a corresponding increase in equity, over the years in which the performance conditions are
fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“vesting date”). The cost of cash-settled transactions is
recognised, along with a corresponding provision for the expected cash settlement, over the vesting period.
At each reporting date, the cumulative expense recognised for equity-settled transactions reflects the extent to which the vesting period has expired and the
number of awards that, in the opinion of management, will ultimately vest. Management’s estimates are based on the best available information at that date.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as
vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
The Group has exposure in respect of cash-settled share-based payment transactions and share-based payment transactions with cash alternatives as defined
by IFRS 2 “Share-Based Payment” in respect of bad leaver provisions in the Group’s JSOS, the Cash LTIP and the Beauty MIP (see Note 3.11 Provisions). National
insurance contribution (NIC) obligations arising from cash-settled schemes and HMRC unapproved equity-settled schemes are treated as if they are cash-settled,
regardless of the actual cash/equity determination of the scheme itself.
Share Options and Other Equity Instruments
The Group operates various employee share incentive schemes, namely the Executive Share Ownership Scheme (the “ESOS”), the Joint Share Ownership Scheme
(the “JSOS”), the Sharesave Scheme, the Long Term Incentive Plan (“LTIP”), the Growth Incentive Plan (“GIP”) and the share incentive plan (“SIP”). The Group also
operates two cash-settled incentive schemes, the Cash LTIP and the Beauty MIP.
The total expense for the period relating to employee share-based payment plans was £6.9 million (2016: £7.1 million), of which £5.3 million (2016: £6.4 million)
related to equity-settled share-based payment transactions and £1.6 million (2016: £0.7 million) as a provision for the payment of employers’ NIC upon allotment
of HMRC unapproved equity-settled share schemes, the Cash LTIP and the Beauty MIP (see Note 3.11 Provisions for further details).
(a) ESOS
The Group’s ESOS is an equity-settled share option scheme approved by HMRC. Options have also been granted under the terms of HMRC’s schedule, which is not
approved. The ESOS was established by Ocado in 2001.
Under the ESOS, Ocado or the trustees of an employee trust may grant options over shares in the Company to eligible employees. The eligible employees
to whom options are granted and the terms of such options will be determined by the Directors of Ocado or the trustees. The employees who are eligible to
participate in the ESOS are all Ocado’s Executive Directors and employees, including the employees of the Company’s subsidiaries. Options are not transferable.
The exercise price of options may not be less than the market value of the Company’s shares on the date of grant. If the trustees or the Directors have determined
that the exercise of an option will be satisfied by the issue of ordinary shares, the exercise price may also not be less than the nominal value of ordinary shares.
The Directors of Ocado or the trustees may impose a performance target and any further condition determined to be appropriate on the exercise of an option.
In most cases any performance target must be measured over a period of at least three years. There are currently no options granted which are subject to
performance targets that have not yet been met. The vesting period for the ESOS is three years. If the options remain unexercised after a period of ten years from
the date of grant or the employee leaves the Group, the options expire (subject to a limited number of exceptions).
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165
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.10 Share Options and Other Equity Instruments (continued)
At each respective balance sheet date the outstanding options were as follows:
Approved
Year of Issue
3 December
2017
Exercise
Price
(£)
27 November
2016
Exercise Price
(£)
Exercise Period
2006
2007
2008
2008
2009
2009
2010
2011
2011
2012
2012
2012
2013
2013
2014
2014
2015
2015
2015
2016
2016
2017
2017
2007
2009
2012
2014
2014
2014
2015
2015
2015
2016
2016
2017
2017
—
—
6,695
19,710
25,106
97,743
163,049
163,777
52,839
192,174
418,925
90,747
246,073
116,506
40,579
357,294
369,011
22,980
30,435
549,780
31,196
1,119,038
23,667
4,137,324
—
122,600
119,088
23,945
27,901
10,617
28,807
16,222
16,740
139,674
58,933
204,616
96,956
866,099
5,003,423
—
—
1.35
1.20
1.20
1.35
1.65
2.55
1.89
1.03
1.05
0.85
1.28
3.02
5.10
4.84
3.77
4.46
4.39
2.70
2.59
2.56
2.92
—
1.20
1.05
4.84
3.36
3.27
3.77
4.46
4.39
2.70
2.59
2.56
2.92
2,073
54,534
22,420
22,891
32,173
116,647
172,265
185,460
60,871
241,217
486,212
153,824
323,383
133,312
45,656
379,030
394,350
22,980
35,439
597,596
31,968
—
—
3,514,301
50,833
122,600
119,088
23,945
29,962
11,578
30,901
18,172
18,803
152,922
63,532
—
—
642,336
4,156,637
1.50
1.50
1.35
1.20
1.20
1.35
1.65
2.55
1.89
1.03
1.05
0.85
1.28
3.02
5.10
4.84
3.77
4.46
4.39
2.70
2.59
30/11/09–29/11/16
31/05/10–30/05/17
31/05/11–30/05/18
30/11/11–29/11/18
31/05/12–30/05/19
02/11/12–29/11/19
30/06/13–29/06/20
14/02/14–13/02/21
19/07/14–18/07/21
21/02/15–13/02/22
09/03/15–08/03/22
27/06/15–26/06/22
05/03/16–04/03/23
08/07/16–07/07/23
05/02/17–04/02/24
17/03/17–16/03/24
13/03/18–12/03/25
01/07/18–30/06/25
10/07/18–09/07/25
16/03/19–15/03/26
15/07/19–14/07/26
— 14/03/20–13/03/27
— 15/08/20–14/08/27
1.50
1.20
1.05
4.84
3.36
3.27
3.77
4.46
4.39
2.70
2,59
31/05/10–30/05/17
31/05/12–30/05/19
09/03/15–08/03/22
17/03/17–16/03/24
01/08/17–31/07/24
08/08/17–07/08/24
13/03/18–12/03/25
01/07/18–30/06/25
10/07/18–09/07/25
16/03/19–15/03/26
15/07/19–14/07/26
— 14/03/20–13/03/27
— 15/08/20–14/08/27
Total Approved Options
Non-Approved
Total Non-Approved Options
Total
Of the total employee share options above, the following options were subject to performance criteria in relation to the average contribution by basket and
EBITDA A :
3 December 2017
27 November 2016
Year of Issue
2009
Number of
Share Options
Exercise Price
(£)
Number of
Share Options
Exercise Price
(£)
Exercise Period
139,600
139,600
1.20
139,600
139,600
1.20
31/05/12–30/05/19
Total options subject to performance criteria
A
See Alternative Performance
Measures on page 196
166
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.10 Share Options and Other Equity Instruments (continued)
Details of the movement in the number of share options outstanding during each period are as follows:
Outstanding at the beginning of the period
Granted during the period
Forfeited during the period
Exercised during the period
Outstanding at the end of the period
Exercisable at the end of the period
3 December 2017
27 November 2016
Weighted
Average
Exercise Price
(£)
2.38
2.59
2.95
1.28
2.51
2.10
Weighted
Average
Exercise Price
(£)
2.24
2.69
3.04
1.25
2.38
1.42
Number of
Share Options
3,939,825
899,687
(272,688)
(410,187)
4,156,637
2,299,803
Number of
Share Options
4,156,637
1,503,946
(242,828)
(414,332)
5,003,423
2,295,368
Since the Company’s Admission, the market value of the Company’s shares at each option grant date was taken to be the closing mid-market price of the shares
on the day prior to issuance. Prior to the Admission, the market value of the Company’s shares was derived based on the market value of similar companies and
by taking into account transactions with shareholders during the relevant period. The Share Valuation Office of HMRC has confirmed in correspondence that in
respect of options granted prior to Admission, the exercise price was not less than the market value of the Company’s shares at each option grant date.
For exercises during the period, the weighted average share price at the date of exercise was £2.83 (2016: £2.84).
In determining the fair value of the share options granted during the period, the Black–Scholes Option Pricing Model was used with the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Weighted expected life — years
Weighted average risk-free interest rate
Expected dividend yield
3 December
2017
27 November
2016
£2.59
£2.59
0.40
3.00
0.1%
0.0%
£2.69
£2.69
0.40
3.00
0.5%
0.0%
The expected volatility was determined by considering the historical performance of the Company's shares. The expected life used in the model has been
adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. All share awards under
the ESOS are equity-settled, apart from employer’s NIC due on unapproved ESOS awards which is treated as cash-settled.
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167
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.10 Share Options and Other Equity Instruments (continued)
The weighted average remaining contractual lives for outstanding share options under the ESOS are as follows:
3 December 2017
27 November 2016
Weighted
Average
Remaining
Contractual
Life
(years)
Exercise Price
(£)
Number of
Share Options
Weighted
Average
Remaining
Contractual Life
(years)
Exercise Price
(£)
Number of
Share Options
0.85
1.03
1.05
1.20
1.28
1.35
1.50
1.65
1.89
2.55
2.56
2.59
2.70
2.92
3.02
3.27
3.36
3.77
4.39
4.46
4.84
5.10
90,747
192,174
538,013
167,416
246,073
104,438
—
163,049
52,839
163,777
1,323,654
90,129
689,454
120,623
116,506
10,617
27,901
397,818
47,175
39,202
381,239
40,579
5,003,423
4.6
4.2
4.3
1.4
5.3
1.8
—
2.6
3.6
3.2
9.3
8.6
8.3
9.7
5.6
6.7
6.7
7.3
7.6
7.6
6.3
6.2
0.85
1.03
1.05
1.20
1.28
1.35
1.50
1.65
1.89
2.55
—
2.59
2.70
—
3.02
3.27
3.36
3.77
4.39
4.46
4.84
5.10
153,824
241,217
605,300
177,664
323,383
139,067
107,440
172,265
60,871
185,460
—
95,500
750,518
—
133,312
11,578
29,962
425,251
54,242
41,152
402,975
45,656
4,156,637
5.5
5.2
5.3
2.5
6.3
2.8
0.6
3.6
4.6
4.2
—
9.6
9.3
—
6.6
7.7
7.7
8.3
8.6
8.6
7.3
7.2
Outstanding at the end of the period
(b) JSOS
The JSOS is an executive incentive scheme which was introduced to incentivise and retain its Executive Directors and select members of senior management of
the Group (the “Participants”). It is a share ownership scheme under which the Participants and Estera Trust (Jersey) Limited, the Employee Benefit Trust Trustee,
held at the balance sheet date separate beneficial interests in 32,803,390 (2016: 32,830,613) ordinary shares which represents 5.2% (2016: 5.2%) of the issued share
capital of the Company. Of these ordinary shares, 79,032 (2016: 79,032) are held by the Employee Benefit Trust on an unallocated basis.
Nature of Interests
Interests take the form of a restricted interest in ordinary shares in the Company (the “Interest”). An Interest permits a Participant to benefit from the increase (if
any) in the value of a number of ordinary shares in the Company (“Shares”) over specified threshold amounts. In order to acquire an Interest, a Participant must
enter into a joint share ownership agreement with the Employee Benefit Trust Trustee, under which the Participant and the Employee Benefit Trust Trustee jointly
acquire the Shares and agree that once all vesting conditions have been satisfied the Participant is awarded a specific number of Shares equivalent to the benefit
achieved, or at their discretion, when the Shares are sold, the Participant has a right to receive a proportion of the sale proceeds insofar as the value of the Shares
exceeds the threshold amount.
168
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.10 Share Options and Other Equity Instruments (continued)
Participants
In prior periods, Interests were acquired by the Participants under the first JSOS scheme (“JSOS1”) in 32,476,700 Shares at an issue price of £1.50 per share, and
the second group of Participants’ JSOS scheme (“JSOS2”) in 3,990,799 Shares at an issue price of £1.70 per share. In prior periods 2,953,675 Shares, in which
interests of Participants have lapsed, were reallocated to the third group of Participants under the JSOS scheme (“JSOS3”). For JSOS1 and JSOS2 there are four
tranches, each with their own hurdle price. For JSOS3 there are two tranches, each with their own hurdle price.
JSOS1
Vesting
Date
Jan 2011
Jan 2012
Jan 2013
Jan 2014
Hurdle
Value
£1.73
£1.91
£2.08
£2.28
%
of Issue
Price
115%
127%
139%
152%
JSOS2
Tranche
1 (2012)
2 (2013)
3 (2014)
4 (2015)
Vesting
Date
Jun 2012
Jun 2013
Jun 2014
Jun 2015
Hurdle
Value
£1.96
£2.15
£2.36
£2.59
%
of Issue
Price
115%
127%
139%
152%
Tranche
1 (2011)
2 (2012)
3 (2013)
4 (2014)
JSOS3
Tranche
1 (2013)
2 (2014)
—
—
Vesting
Date
Jan 2013
Jan 2014
—
—
Hurdle
Value
%
of Market Price
£1.70
£1.80
—
—
230% — 265%
244% — 280%
—
—
For JSOS1, Participants were required to purchase their Interest for 2.0% of the issue price. For JSOS2, the price was in a range of 7.1% to 10.8%, and for JSOS3,
the price was in a range of 1.47% to 1.70% of the share price at date of issue. When an Interest vests, the Employee Benefit Trust Trustee will transfer Shares to
the Participant of equal value to the Participant’s Interest or the Shares will be sold and the Employee Benefit Trust Trustee will account to the Participant for the
balance, i.e. the difference between the sale proceeds (less expenses) and the hurdle price.
Vesting Conditions
The vesting of the Interests granted to Participants is subject to a time vesting condition, as detailed above.
The fair value of the Interests awarded under the JSOS was determined using the Black–Scholes Option Pricing Model. As per IFRS 2 “Share-Based Payment”,
market-based vesting conditions and the share price target conditions in the JSOS have been taken into account in establishing the fair value of the equity
instruments granted. Other non-market or performance-related conditions were not taken into account in establishing the fair value of equity instruments
granted; instead, these non-market vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the
transaction amount so that ultimately the amount recognised for services received as consideration for the equity instruments granted is based on the number of
equity instruments that will eventually vest.
In determining the fair value of the Interests granted, the Black–Scholes Option Pricing Model was used with the following inputs:
JSOS1
Weighted average share price
Weighted average exercise price
Expected volatility
Weighted expected life — years
Risk-free interest rate
Expected dividend yield
JSOS2
Weighted average share price
Weighted average exercise price
Expected volatility
Weighted expected life — years
Risk-free interest rate
Expected dividend yield
Tranche 1
Tranche 2
Tranche 3
Tranche 4
£1.35
£1.73
0.25
0.91
3.5%
0.0%
£1.35
£1.91
0.25
1.91
3.5%
0.0%
£1.35
£2.08
0.25
2.91
3.5%
0.0%
£1.35
£2.28
0.25
3.91
3.5%
0.0%
Tranche 1
Tranche 2
Tranche 3
Tranche 4
£1.70
£1.96
0.25
1.0
3.5%
0.0%
£1.70
£2.15
0.25
2.0
3.5%
0.0%
£1.70
£2.36
0.25
3.0
3.5%
0.0%
£1.70
£2.59
0.25
4.0
3.5%
0.0%
Expected volatility was determined by comparing the Company to a basket of others of a similar size or which operate in a similar industry.
As the Interests in JSOS3 were reallocated from lapsed Interests in JSOS1 and JSOS2, the fair value of those Interests had been calculated in prior periods using
the inputs disclosed in the tables above.
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169
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.10 Share Options and Other Equity Instruments (continued)
Details of the movement in the number of Interests in Shares during each period are as follows:
Outstanding at the beginning of the period
Exercised during the period
Outstanding at the end of the period
Exercisable at the end of the period
3 December 2017
27 November 2016
Number of
Interests in
Shares
32,751,581
(27,223)
32,724,358
32,724,358
Weighted
Average
Exercise Price
(£)
1.99
2.79
1.99
1.99
Number of
Interests in
Shares
32,776,910
(25,329)
32,751,581
32,751,581
Weighted
Average
Exercise Price
(£)
1.99
2.05
1.99
1.99
(c) Non-Employee Share Options
Options to subscribe for ordinary shares and convertible preference shares have been granted by Ocado Limited to non-employees. These options are equity-
settled, and do not have any vesting criteria. As a result of the Group’s restructuring in 2014, these options are now held over ordinary shares in Ocado Group plc.
At each respective balance sheet date the outstanding options were as follows:
January 2004
Outstanding at the end of the period
3 December 2017
27 November 2016
Number of
Share Options
Exercise Price
(£)
Number of
Share Options
Exercise Price
(£)
Exercise Period
435,300
435,300
1.03
435,300
435,300
1.03 03/01/04 – 03/01/18
There was no movement in the number of non-employee share options outstanding in the period (2016: £nil). All non-employee share options are exercisable at
the end of the period.
The weighted average remaining contractual lives for outstanding non-employee share options are as follows:
3 December 2017
27 November 2016
Weighted
Average
Remaining
Contractual
Life
(years)
Exercise Price
(£)
Number of
Share Options
0.1
1.03
435,300
435,300
Weighted
Average
Remaining
Contractual Life
(years)
1.1
Exercise Price
(£)
Number of
Share Options
1.03
435,300
435,300
Outstanding at the end of the period
(d) Sharesave Scheme
In 2010 the Group launched the Ocado Group Sharesave Scheme (“SAYE”). This is an HMRC approved scheme and is open to any person that was an employee or
officer of the Group at the launch date. Under the scheme, members save a fixed amount each month for three years. At the end of the three-year period they are
entitled to use these savings to buy shares in the Company at 90% of the market value at launch date.
At 3 December 2017 employees of the Company’s subsidiaries held 1,817 (2016: 2,950) contracts in respect of options over 4,454,396 (2016: 6,260,286) shares.
Details of the movement in the number of Sharesave options outstanding during each period are as follows:
Outstanding at the beginning of the period
Granted during the period
Forfeited during the period
Exercised during the period
Outstanding at the end of the period
Exercisable at the end of the period
170
3 December 2017
27 November 2016
Weighted
Average
Exercise Price
(£)
2.51
—
2.69
3.01
2.03
—
Weighted
Average
Exercise Price
(£)
3.16
2.28
3.17
2.31
2.51
3.01
Number of
Share Options
3,549,479
4,582,171
(1,864,633)
(6,731)
6,260,286
821,345
Number of
Share Options
6,260,286
—
(1,648,874)
(157,016)
4,454,396
—
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.10 Share Options and Other Equity Instruments (continued)
(e) Long Term Incentive Plan
The Group operates equity-settled long-term incentive plans (“LTIP”) as approved by the Remuneration Committee and shareholders, under which shares are
conditionally awarded to Executive Directors and select members of senior management. The number of awards issued are calculated based on a percentage of
the participants’ salaries and will vest at the end of a period of three years from the grant date. The final number and proportion of awards expected to vest will
depend on achievement of certain performance conditions. For both the 2015 LTIP and the 2016 LTIP, there are four equally weighted performance conditions,
which are operational efficiency and capital efficiency metrics related to the retail business and the platform business, the Group’s retail business revenue and the
Group’s retail business earnings before tax for the financial year ending 3 December 2017, and financial year ending 2 December 2018 respectively. For the 2017
LTIP, there are four equally weighted performance conditions based on performance in the 2019 financial year, which are operational efficiency related to the retail
business, Ocado Smart Platform sales target, the Group's retail business revenue and the Group's retail business earnings before tax.
The number of awards issued, adjusted to reflect the achievement of the performance conditions, will then vest during 2017 for the 2014 LTIP, 2018 for the 2015
LTIP, 2019 for the 2016 LTIP and 2020 for the 2017 LTIP. Full vesting will only therefore occur where exceptional performance levels have been achieved and
significant shareholder value created. An award will lapse if a participant ceases to be employed within the Group before the vesting date.
A summary of the status of the LTIP as at 3 December 2017 and changes during the year is presented below:
Outstanding at the beginning of the period
Granted during the period
Vested during the period
Outstanding at the end of the period
Number of
Share Awards
3 December
2017
Number of
Share Awards
27 November
2016
3,151,610
1,829,906
(672,808)
4,308,708
6,076,621
1,490,029
(4,415,040)
3,151,610
There were no awards exercisable as at 3 December 2017 (2016: none).
The Group recognised an expense of £1.5 million (2016: £2.8 million) related to these awards in the Consolidated Income Statement during the year. The
expectation of meeting the performance criteria, based upon internal budgets and forecasts, was taken into account when calculating this expense.
(f) Chairman’s Share Matching Award
In 2013, the Group introduced the equity-settled Chairman’s Share Matching Award, under which a one-off award of restricted shares was awarded to the
Chairman, Lord Rose, on assuming the role of Chairman.
The award condition is based on a personal investment of a minimum of 400,000 shares and continued membership of the Board. The award vested in the current
period, being three years from when the award was approved by the shareholders. There were no performance criteria to which vesting was subject.
These shares are restricted from being sold while he is on the Board and the shares are not allowed to be sold until the first anniversary of his ceasing to be a
member of the Board.
A summary of the status of this Chairman’s Share Matching Award as at 3 December 2017 and changes during the year is presented below:
Outstanding at the beginning of the period
Exercised during the period
Outstanding at the end of the period
Number of
Share Awards
3 December
2017
Number of
Share Awards
27 November
2016
—
—
—
452,284
(452,284)
—
The Group did not recognise an expense related to this award in the Consolidated Income Statement during the year (2016: £0.1 million).
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171
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.10 Share Options and Other Equity Instruments (continued)
(g) Growth Incentive Plan
In 2014, the Group introduced an equity-settled growth incentive plan (“GIP”), under which nil cost shares were conditionally awarded to certain Executive Directors.
The final number and proportion of awards expected to vest will depend on achievement of a performance condition, being the growth in the Company’s share
price relative to the growth in the FTSE 100 Share Index over a five-year performance period.
These awards will vest in 2019. An award will lapse if a participant ceases to be employed within the Group before the vesting date.
Performance will be assessed based on the three-month average share price of the Company and the FTSE 100 Share Index at the end of the performance period
in comparison to the three-month average share price of the Company and the FTSE 100 Share Index prior to the start of the performance period.
In determining the fair value of the awards granted, a unique Monte Carlo model was used with the following inputs:
Weighted average share price
Value of FTSE 100 Index
Expected correlation
Expected volatility of Company
Expected volatility of FTSE 100 Index
Weighted expected life – years
Risk-free rate
Expected dividend yield
Valuation model
£3.19
6,389.25
29%
40%
16%
5.0
1.96%
0%
Monte Carlo Pricing
Expected correlation was determined with reference to the share price correlation of the shares in the Company and the FTSE 100 Index over a period
commensurate with the terms of the award (i.e. five years).
Expected volatility of the Company was determined by comparing the Company to others of a similar size or which operate in a similar industry. Expected volatility
of the FTSE 100 Index was determined by reference to its historical volatility over a period commensurate with the terms of the award (i.e. five years). Volatility is a
key estimate in determining the fair value of the GIP award, as the overall charge is most sensitive to changes in this assumption. Management have had regard to
an appropriate range of alternative volatility assumptions, and concluded that a change in the volatility within this range would not have a material impact on the
financial statements.
The use of the Monte Carlo model and calculation of the associated input parameters requires judgement. Therefore management obtained professional advice to
assist in determining the fair value of the awards granted.
A summary of the GIP as at 3 December 2017 and changes during the year is presented below:
Outstanding at 29 November 2015
Granted during the year
Outstanding at 27 November 2016
Granted during the year
Outstanding at 3 December 2017
Number of
Share Awards
6,000,000
—
6,000,000
470,000
6,470,000
There were no awards exercisable as at 3 December 2017 (2016: none).
The Group recognised an expense of £1.6 million (2016: £1.2 million) related to these awards in the Consolidated Income Statement during the year. The
expectation of meeting the performance criteria was taken into account when calculating this expense.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.10 Share Options and Other Equity Instruments (continued)
(h) Share Incentive Plan
In 2014, the Group introduced the Ocado Share Incentive Plan (“SIP”). This HMRC approved scheme provides all employees, including Executive Directors, the
opportunity to receive and invest in Company shares. All SIP shares are held in a SIP Trust, administered by Yorkshire Building Society.
There are two elements in the plan – the Buy As You Earn (“BAYE”) arrangement and the Free Share Award. Under the BAYE, participants can purchase shares in the
Company (“Partnership Shares”) each month using contributions from pre-tax pay, subject to an upper limit. For every seven shares purchased, the Company gifts
the participant one free share (“Matching Shares”).
Under the Free Shares Award, shares are given to eligible employees, as a proportion of their annual base pay, subject to a maximum. Eligible employees are those
with six months’ service as at the grant date.
For Partnership Shares, eligible employees are those with three months’ service. Partnership shares can be withdrawn from the Plan Trust at any time; however,
Matching Shares and Free Shares are subject to a three-year holding period, during which continuous employment within the Group is required. The Matching
Shares will be forfeited if any corresponding Partnership Shares are removed from the Plan Trust within this three-year period, or if the participant leaves Ocado.
A summary of the status of the SIP as at 3 December 2017 and changes during the year is presented below:
Outstanding at 29 November 2015
Awarded during the period
Forfeited during the period
Released during the period
Outstanding at 27 November 2016
Unrestricted at 27 November 2016
Outstanding at 27 November 2016
Awarded during the period
Forfeited during the period
Released during the period
Outstanding at 3 December 2017
Unrestricted at 3 December 2017
Partnership
Shares
Matching
Shares
173,158
195,565
—
(50,429)
318,294
318,294
24,450
27,856
(6,278)
(852)
45,176
—
Partnership
Shares
Matching
Shares
318,294
197,130
—
(78,635)
436,789
436,789
45,176
28,072
(10,108)
(1,042)
62,098
—
Free
Shares
744,006
693,341
(132,914)
(10,703)
1,293,730
1,909
Free
Shares
1,293,730
752,800
(202,568)
(43,110)
1,800,852
1,032
Number of
Share Awards
Total
941,614
916,762
(139,192)
(61,984)
1,657,200
320,203
Number of
Share Awards
Total
1,657,200
978,002
(212,676)
(122,787)
2,299,739
437,821
In the year, the Group recognised an expense of £1.0 million (2016: £0.6 million) related to these awards. The expectation of meeting the holding period was taken
into account when calculating this expense.
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173
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
4.11 Capital Management
The Board’s objective is to maintain an appropriate balance of debt and equity financing to enable the Group to continue as a going concern, to sustain future
development of the business and to maximise returns to shareholders and benefits to other stakeholders.
The Board closely manages trading capital, defined as net assets plus net debt A . Net debt A is calculated as total debt (obligations under finance leases and
borrowings as shown in the Consolidated Balance Sheet), less cash and cash equivalents. The Group’s net assets at the end of the period were £270.7 million
(2016: £262.4 million) and it had net debt A of £228.0 million (2016: £164.9 million).
The main areas of capital management revolve around working capital management and compliance with externally imposed financial covenants. The Group’s
objectives when managing capital are to safeguard its ability to continue as a going concern and balance the needs of the Group to grow, whilst operating with
sufficient headroom within its bank covenants. The components of working capital management include monitoring inventory turn, age of inventory, age of
receivables, receivables' days, payables' days, balance sheet reforecasting, period projected profit/(loss), weekly cash flow forecasts and daily cash balances. Major
investment decisions are based on reviewing the expected future cash flows and all major capital expenditure requires approval by the Board. There were no
changes in the Group’s approach to capital management during the period.
In the current year the Group raised £250 million of finance through the issue of senior secured notes with a fixed coupon rate of 4% and a maturity date of seven
years. The £210 million RCF was reduced to £100 million and extended by a further three years to 2022. The funds from the senior secured notes issue have been
used to pay down existing debt, including the £87.5 million previously drawn on the RCF. The remaining funds will be used for capital expenditure to increase
capacity.
The Group regularly reviews its financing arrangements. Throughout the period, the Group has complied with all covenants imposed by lenders. In addition, a key
aspect of capital management was the strategic operating agreement with Morrisons and the operation of MHE JVCo, a company jointly owned with Morrisons,
discussed in Note 5.4.
Given the Group’s commitment to expand the business and the investment required to complete Andover CFC and future CFCs, the declaration and payment of a
dividend is not part of the short-term capital management strategy of the Group.
At the Balance Sheet date, the Group’s undrawn facilities and cash and cash equivalents were as follows:
Total facilities available
Facilities drawn down†
Undrawn facilities at end of period‡
Cash and cash equivalents
Notes
4.2
3.9
3 December
2017
£m
27 November
2016
£m
511.5
(378.0)
133.5
150.0
283.5
400.6
(215.8)
184.8
50.9
235.7
† In the current year, the unsecured £210 million revolving facility was reduced to £100 million and extended by three years to 2022.
‡ The undrawn facility at the end of the period, includes transaction costs. If transaction costs are excluded, then the undrawn facility is £126.8 million.
As at 3 December 2017 the unsecured £100 million revolving facility has not been utilised. Transaction costs of £6.7 million relating to the senior secured notes
have been capitalised. The Group regularly reviews its financing arrangements.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 SECTION 5 — OTHER NOTES
5.1 Subsidiaries
In accordance with section 409 of the Companies Act 2006, a full list of related undertakings, the country of incorporation and the effective percentage of equity
owned, as at 3 December 2017 is disclosed below:
Name
Principal Activity
Share Class
Proportion of
Share Capital Held
(direct/indirect)
Country of Incorporation
100%
100%
100%
100%
100%
100%
Holding company
Non-trading company
Trading company
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Holding company
Retail
Technology
Logistics and Distribution
Business Services
Non-trading company
The following companies are registered at Buildings One & Two Trident Place, Mosquito Way, Hatfield, Hertfordshire, United Kingdom, AL10 9UL:
Ocado Holdings Limited
Ocado Retail Limited
Ocado Innovation Limited
Ocado Operating Limited
Ocado Central Services Limited
Ocado Innovation Holdings Limited
Ocado International Holdings Limited (formerly
Jalapeno Partners Limited)
Last Mile Technology Limited
MHE JVCo Limited
The following companies are registered at Aquarius House, Bessemer Road, Welwyn Garden City, Hertfordshire, AL7 1HH:
Speciality Stores Limited
Paws & Purrs Limited
Marie Claire Beauty Limited
The following company is registered at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2, Ireland:
Ocado Information Technology Limited
The following company is registered at ul. Rakowicka 7, 31-511, Krakow, Poland:
Ocado Polska Sp. z o.o.
The following company is registered at Av. Josep Tarradellas 38, Planta 8a, 08029, Barcelona, Spain:
Ocado Spain S.L.U.
The following company is registered at 1209 Orange Street, Wilmington, Delaware 19801, United States of America:
Oxford US LLC
The following company is registered at 17 Henrik Ibsen Street, Lozenets District, Sofia 1407, Bulgaria:
Ocado Bulgaria EOOD
The following company is registered at Paneltex House, Somerden Road, Hull, HU9 5PE:
Paneltex Limited
Trading company
Retail
Retail
Ordinary shares
Ordinary shares
£1.00 “B” shares
Ordinary shares
Ordinary shares
Ordinary shares
100%
100%
48.5%
Non-trading company
100%
100%
98%
Intellectual property
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Manufacturing
Technology
Technology
Technology
100%
100%
100%
100%
100%
25%
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Republic of Ireland
Poland
Spain
United States of America
Bulgaria
UK
In accordance with the exemption under Section 479A of the Companies Act, the standalone financial statements for a subsidiary, Paws & Purrs Limited (company
number 07538307), will not be audited for the year ended 3 December 2017, but are included in the Group’s consolidated financial statements in the period.
The Group has effective control over the financial and operating activities of the Ocado Cell in Atlas Insurance PCC Limited, an insurance company incorporated in
Malta and therefore consolidates the Ocado Cell in its financial statements in accordance with IFRS 10 “Consolidated Financial Statements”. The Group uses the
Ocado Cell to provide self-insurance for its vehicle fleet and public and product liability claims.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE CONSOLIDATED
Financial Statements
5.2 Commitments
Capital Commitments
Contracts placed for future capital expenditure but not provided for in the financial statements are as follows:
Land and buildings
Property, plant and equipment
Total capital expenditure committed at the end of the period
3 December
2017
£m
27 November
2016
£m
2.7
42.3
45.0
2.5
31.9
34.4
Of the total capital expenditure committed at the period end, £37.2 million (2016: £25.7 million) relates to new CFCs, £2.2 million (2016: £0.8 million) to existing
CFCs, £0.3 million (2016: £1.7 million) to fleet costs and £0.2 million (2016: £2.0 million) relates to technology-related projects.
Operating Lease Commitments
The Group leases a number of offices, facilities and equipment under non-cancellable operating leases. The leases have varying terms, escalation clauses and
renewal rights.
At 3 December 2017 the ageing profile of future aggregate minimum lease payments under non-cancellable operating leases is as follows:
Due within one year
Due after one year but less than five
Due after five years
Total commitment
3 December
2017
£m
27 November
2016
£m
25.0
84.9
263.7
373.6
20.3
75.2
280.2
375.7
5.3 Contingent Liabilities
The Group has contingent liabilities in respect of legal claims arising in the ordinary course of business, all of which the Group expects will be either covered by its
insurances or will not be material in the context of the Group’s financial position.
5.4 Related Party Transactions
Key Management Personnel
Only the Executive and Non-Executive Directors are recognised as being key management personnel. It is the Board which has responsibility for planning, directing
and controlling the activities of the Group. The key management compensation is as follows:
Salaries and other short-term employee benefits
Share-based payments
3 December
2017
£m
27 November
2016
£m
3.1
2.4
5.5
3.2
3.1
6.3
Further information on the remuneration of Directors and Directors’ interests in ordinary shares of the Company is disclosed in the Directors’ Remuneration Report
on pages 70 to 109.
Other related party transactions with key management personnel made during the period related to the purchase of professional services and amounted to £2,700
(2016: £900). All transactions were on an arm’s length basis and no period end balances arose as a result of these transactions. At the end of the period, there were
no amounts owed by key management personnel to the Group (2016: £nil). There were no other material transactions or balances between the Group and its key
management personnel or members of their close family.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 5.4 Related Party Transactions (continued)
Investment
The following transactions were carried out with Paneltex Limited, a company incorporated in the UK in which the Group holds a 25% interest. Further information
on the Group’s relationship with Paneltex Limited is provided in Note 3.3.
Purchase of goods
— Plant and machinery
— Consumables
Sale of goods
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
0.7
0.5
0.2
—
0.5
0.1
Indirect transactions, consisting of the purchase of plant and machinery through some of the Group’s finance lease counterparties, were carried out with Paneltex
Limited to the value of £6.3 million (2016: £11.8 million). At period end, Paneltex Limited owed the Group £15,000 (2016: the Group owed Paneltex Limited £57,000).
Joint Venture
The following transactions were carried out with MHE JVCo, a joint venture company, incorporated in the UK, in which the Group holds an interest:
Capital contributions made to MHE JVCo
Dividend received from MHE JVCo
Reimbursement of supplier invoices paid on behalf of MHE JVCo
Lease of assets from MHE JVCo
Capital element of finance lease instalments paid to MHE JVCo
Interest element of finance lease instalments accrued or paid to MHE JVCo
3 December
2017
£m
27 November
2016
£m
—
7.6
7.5
1.3
16.0
5.2
1.1
8.4
4.9
3.1
13.8
5.8
During the period the Group paid lease instalments (including interest) of £21.2 million (2016: £19.6 million) to MHE JVCo.
Of the £21.2 million, £10.1 million (2016: £10.7 million) was recovered directly from Morrisons in the form of Other Income and a further £7.6 million (2016: £8.4 million)
was received from MHE JVCo by way of a dividend. The remaining £3.5 million (2016: £0.5 million) represents capital expenditure requirements of MHE JVCo for which
no additional funding was required from Ocado. The net result is the termination of £16.0 million of MHE JVCo debt during the period (2016: £13.8 million) with no
corresponding net cash outflow.
In the current period, the Group made no additional capital contributions to MHE JVCo (2016: £1.1 million).
Included within trade and other receivables is a balance of £1.7 million owed by MHE JVCo (2016: £5.3 million). £0.7 million of this relates to a finance lease accrual
which is included within other receivables (2016: £0.8 million). £1.0 million (2016: £4.5 million) relates to capital recharges.
Included within trade and other payables is a balance of £1.9 million owed to MHE JVCo (2016: £3.8 million).
Included within obligations under finance leases is a balance of £94.1 million owed to MHE JVCo (2016: £108.7 million).
No other transactions that require disclosure under IAS 24 “Related Party Disclosures” have occurred during the current financial period.
5.5 Post Balance Sheet Events
There have been no significant events, outside the ordinary course of business, affecting the Group since 3 December 2017.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com 178
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 OUR
OUR
Financials (Company)
Financials (Group)
Company Balance Sheet
Company Statement of Changes in Equity
Company Statement of Cash Flows
Notes to the Company Financial Statements
180
181
182
183
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Stock Code: OCDO | www.ocadogroup.com COMPANY
Balance Sheet
as at 3 December 2017
Non-current Assets
Investments
Current Assets
Other receivables
Cash and cash equivalents
Total Assets
Current Liabilities
Trade and other payables
Provisions
Net Current Assets
Non-current Liabilities
Borrowings
Provisions
Net Assets
Equity
Share capital
Share premium
Retained earnings
Total Equity
3 December
2017
£m
27 November
2016
£m
Notes
3.1
3.3
3.4
3.5
3.6
4.1
3.6
4.2
4.2
512.5
512.5
386.7
117.5
504.2
1,016.7
(5.5)
(0.8)
(6.3)
497.9
(243.3)
(2.6)
(245.9)
764.5
12.6
261.6
490.3
764.5
505.6
505.6
244.0
14.6
258.6
764.2
(0.3)
(0.9)
(1.2)
257.4
—
(1.6)
(1.6)
761.4
12.6
260.1
488.7
761.4
The Company's loss for the period was £3.7 million (2016: £nil).
The notes on pages 183 to 191 form part of these financial statements.
The Company financial statements on pages 180 to 191 were authorised for issue by the Board of Directors and signed on its behalf by:
Tim Steiner
CHIEF EXECUTIVE OFFICER
Duncan Tatton-Brown
CHIEF FINANCIAL OFFICER
Ocado Group plc
Company Registration Number 07098618 (England and Wales)
6 February 2018
180
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 COMPANY STATEMENT OF
Changes in Equity
for the 53 weeks ended 3 December 2017
Balance at 29 November 2015
Result for the period
Total Comprehensive Income for the Period
Ended 27 November 2016
Transactions with owners:
– Issue of ordinary shares
– Share-based payments charge
Total Transactions with Owners
Balance at 27 November 2016
Loss for the period
Total Comprehensive Income for the Period
Ended 3 December 2017
Transactions with owners:
– Issue of ordinary shares
– Share-based payments charge
Total Transactions with Owners
Balance at 3 December 2017
The notes on pages 183 to 191 form part of these financial statements.
Share
Capital
£m
Share
Premium
£m
Retained
Earnings
£m
Notes
12.6
—
—
—
—
—
12.6
—
—
—
—
—
259.0
—
—
1.1
—
1.1
260.1
—
—
1.5
—
1.5
482.3
—
—
—
6.4
6.4
488.7
(3.7)
(3.7)
—
5.3
5.3
4.2
4.2
4.3
Total
Equity
£m
753.9
—
—
1.1
6.4
7.5
761.4
(3.7)
(3.7)
1.5
5.3
6.8
12.6
261.6
490.3
764.5
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Our FinancialsStock Code: OCDO | www.ocadogroup.com COMPANY STATEMENT OF
Cash Flows
for the 53 weeks ended 3 December 2017
Cash Flow From Operating Activities
Result/(loss) before income tax
Adjustments for:
— Net finance costs
Changes in working capital:
— Movement in provisions
— Movement in other receivables
— Movement in trade and other payables
Cash Generated from Operating Activites
Interest paid
Net Cash Outflow From Operating Activites
Cash Flow From Investing Activities
Interest received
Net Cash From Investing Activities
Cash Flow From Financing Activities
Proceeds from issue of ordinary share capital net of transaction costs
Proceeds from borrowings
Repayment of borrowings
Payment of Financing Fees
Net Cash From Financing Activities
Net Increase/(Decrease) in Cash and Cash Equivalents
Cash and cash equivalents at beginning of period
Cash and Cash Equivalents at End of Period
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
Notes
(3.7)
3.5
0.8
(144.3)
5.3
(138.4)
(3.3)
(141.7)
0.2
0.2
1.5
250.0
—
(7.1)
244.4
102.9
14.6
117.5
—
—
(1.2)
(4.3)
0.1
(5.4)
—
(5.4)
—
—
1.1
—
—
—
1.1
(4.3)
18.9
14.6
3.4
182
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 NOTES TO THE COMPANY
Financial Statements
SECTION 1 — BASIS OF PREPARATION
General Information
Ocado Group plc is incorporated in the United Kingdom. The address of its registered office is Buildings 1 & 2 Trident Place, Mosquito Way, Hatfield, Hertfordshire, AL10
9UL. The financial period represents the 53 weeks ended 3 December 2017 (prior period 52 weeks ended 27 November 2016).
Basis of Preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting
Standards Interpretation Committee (IFRIC) interpretations as endorsed by the European Union (“IFRS-EU”), and those parts of the Companies Act applicable to
companies reporting under IFRS.
The financial statements are presented in sterling, rounded to the nearest hundred thousand unless otherwise stated. They have been prepared under the
historical cost convention, except for financial instruments that have been measured at fair value.
The Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements of the Company.
Exemptions
The Directors have taken advantage of the exemption available under Section 408 of the Companies Act and not presented an income statement or a statement of
comprehensive income for the Company alone.
New standards, amendments and interpretations issued that are effective but not material to the Company
The Company has considered the following new standards, interpretations and amendments to published standards that are effective for the Company for the
financial year beginning 28 November 2016 and concluded that they are either not relevant to the Company or that they would not have a significant impact on
the Company’s financial statements:
Various
IFRS 10
IFRS 11
IFRS 12
IAS 1
IAS 16
IAS 28
IAS 34
IAS 38
Amendments to various IFRSs and IASs including those arising from the IASB’s annual improvements project
Consolidated financial statements (amendments)
Joint arrangements (amendments)
Disclosure in other entities (amendments)
Presentation of financial statements (amendments)
Property, plant and equipment (amendments)
Investments in associates and joint ventures (amendments)
Interim financial reporting (amendments)
Intangible assets (amendments)
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
1 January 2016
New standards, amendments and interpretations not yet adopted by the Company
The following further new standards, interpretations and amendments to published standards and interpretations which are relevant to the Company have been
issued but are not effective for the financial year beginning 28 November 2016 and have not been adopted early:
IFRS 2
IFRS 9
IFRS 15
IFRS 16
IAS 12
IAS 28
Various
Share-based payments (amendments)
Financial instruments
Revenue from contracts with customers
Leases
Income taxes (amendments)
Investments in associates and joint ventures (amendments)
Amendments to various IFRSs and IASs including those arising from the IASB’s annual improvements project
1 January 2018
1 January 2018
1 January 2018
1 January 2019
1 January 2017
1 January 2018
Various
The following new standards are not yet effective and the impact on the Company is currently under review:
— IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 ‘Financial Instruments: Recognition and Measurement’. IFRS 9 includes revised guidance
on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets and
the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.
The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Our initial review of IFRS 9 has
indicated that the impact of this new standard on the Groups’ results is unlikely to be material.
— IFRS 15 “Revenue from Contracts with Customers” (endorsed by the EU) provides on the recognition and measurement of revenue. The standard establishes
a principles-based approach for revenue recognition and is based on the concept of recognising revenue for obligations only when they are satisfied and the
control of goods or services is transferred. This applies to all contracts with customers except those in the scope of other standards. This new standard will
replace IAS 18 “Revenue” and is effective for annual periods beginning on or after 1 January 2018 unless adopted early. The Company does not expect there to
be an impact from IFRS 15. The Company will continue to monitor the impact of IFRS 15 on new service contracts as they arise.
— IFRS 16 “Leases” provides guidance on the classification, recognition and measurement of leases to help provide useful information to the users of financial
statements. The main aim of this standard is to ensure all leases will be reflected on the Consolidated Balance Sheet, irrespective of substance over form. The
new standard will replace IAS 17 “Leases” and is effective for annual periods beginning on or after 1 January 2019 unless adopted early. IFRS 16 is not expected
to have an impact on the amounts recognised in the Company’s consolidated financial statements as the Company currently has no leases.
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE COMPANY
Financial Statements
ACCOUNTING POLICIES
Foreign Currency Translation
Transactions and Balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where
items are remeasured. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation at year end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement.
Taxation
Tax is recognised in the Income Statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case
the tax is also recognised in other comprehensive income or directly in equity respectively.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted by the Balance Sheet date. Management periodically evaluate
positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate
on the basis of amounts expected to be paid to the tax authorities.
Critical Accounting Estimates and Assumptions
The preparation of the Company financial statements requires the use of certain judgements, estimates and assumptions that affect the reported amount of
assets, liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual
results.
SECTION 2 — RESULTS FOR THE YEAR
2.1 Profit Before Tax
Accounting Policies
Administrative Expenses
Administrative expenses consist of fees for professional services, bank charges and any other costs of an administrative nature.
2.2 Operating Results
During the period, the Company obtained audit services from its auditors, Deloitte LLP, to the amount of £70,000 (2016: PricewaterhouseCoopers LLP, £65,000).
2.3 Employee Information
The Company does not incur any direct staff costs as the Group’s employees are employed by a subsidiary company.
Analysis and disclosures in relation to share-based payments are given in Note 4.3.
SECTION 3 — ASSETS AND LIABILITIES
3.1 Investments
Accounting Policies
Investments in Group companies are valued at cost less accumulated impairment.
Investments
Cost
Contributions to subsidiaries:
— Novation of derivative liability in respect of warrants issued by Ocado Limited
— Group share-based payments
Carrying Value at end of Period
3 December
2017
£m
27 November
2016
£m
476.5
1.1
34.9
512.5
476.5
1.1
28.0
505.6
Investments represent investments in Group companies, Ocado Holdings Limited and Ocado Innovation Limited. A list of subsidiary undertakings held by the
Company is disclosed in Note 5.1 to the consolidated financial statements.
Subsidiaries are recharged for the amount recognised as share-based payments relating to awards to their employees. These are recognised as an increase in the
investment in relevant subsidiaries in accordance with IFRS 2 “Share-based Payments”.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 3.2 Working Capital
Accounting Policies
Loans and Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in
current assets, except for maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Company’s loans
and receivables comprise “Other receivables” and “Cash and cash equivalents” in the Balance Sheet.
Other Receivables
Other receivables are non-interest bearing and are recognised initially at fair value, and subsequently at amortised cost, reduced by appropriate allowances for
estimated irrecoverable amounts. No security has been granted over other receivables unless stated otherwise.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank and in hand, demand deposits with banks and short-term deposits with a maturity of three months or less at
the Balance Sheet date.
Financial Liabilities
Financial liabilities are classified according to the substance of the contractual arrangements entered into.
Trade and Other Payables
Trade and other payables are initially recognised at fair value and subsequently at amortised cost, using the effective interest rate method.
3.3 Other Receivables
Amounts due from subsidiary undertakings
3.4 Cash and Cash Equivalents
Cash at bank and in hand
3.5 Trade and Other Payables
Deferred income and accruals
3 December
2017
£m
27 November
2016
£m
386.7
244.0
3 December
2017
£m
27 November
2016
£m
117.5
14.6
3 December
2017
£m
27 November
2016
£m
5.5
5.5
0.3
0.3
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE COMPANY
Financial Statements
3.6 Provisions
Employee Incentive Schemes
Provisions for employee incentive schemes relate to HMRC unapproved equity-settled schemes and the Cash-based Long Term Incentive Plan (“Cash LTIP”). For all
unapproved schemes and the Cash LTIP, the Company is liable to pay employers' NIC upon allotment of the share awards.
Unapproved schemes are the Long Term Incentive Plan (“LTIP”), the Chairman’s Share Matching Award, the Growth Incentive Plan (“GIP”) and unapproved
Executive Share Option Scheme (“ESOS”). For more details on these schemes, refer to Note 4.10 to the consolidated financial statements.
In 2014, the Company established the Cash LTIP in order to incentivise selected high performing employees of the Group. At the end of the three-year vesting
period, employees will be paid a cash amount equal to the notional number of awards at the prevailing share price, adjusted for the achievement of the
performance conditions.
Provisions
As at 29 November 2015
Charged to the Income Statement
— additional provision
— unused amounts reversed
Used during the period
As at 27 November 2016
Charged to the Income Statement
— additional provision
— unused amounts reversed
Used during the period
As at 3 December 2017
Analysis of Total Provisions as at 27 November 2016
Current
Non-current
Analysis of Total Provisions as at 3 December 2017
Current
Non-current
Employee
Incentive
Schemes
£m
3.7
0.9
(0.2)
(1.9)
2.5
1.7
(0.1)
(0.7)
3.4
Employee
Incentive
Schemes
£m
0.9
1.6
2.5
Employee
Incentive
Schemes
£m
0.8
2.6
3.4
Employee Incentive Schemes
The provision consists of the Cash LTIP and employers’ NIC on HMRC unapproved equity-settled schemes.
The Cash LTIP provision represents the expected cash payments to participants upon vesting of the awards. It has been calculated using various assumptions
regarding liquidity, participants’ retention and achievability of the performance conditions and valued with reference to the year end share price. If at any point
following initial valuation any of these assumptions are revised, the charge will need to be amended accordingly. In addition to the base cost, since this is a cash
benefit, the Company will be liable to pay employers' NIC on the value of the cash award on vesting, which is included in the above employer’s NIC provision.
To calculate the employer’s NIC provision, the applicable employer’s NIC rate is applied to the number of share awards which are expected to vest, valued with
reference to the year end share price. The number of share awards expected to vest is dependent on various assumptions which are determined by management;
namely participants’ retention rate, the expectation of meeting the performance criteria, if any, and the liquidity discount. All assumptions are supported by
historical trends and internal financial forecasts, where appropriate.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
3.6 Provisions (continued)
For the GIP, an external valuation was carried out to determine the fair value of the awards granted (see Note 4.10 (g) to the consolidated financial statements).
If at any point during the life of each share award any non-market conditions are subject to change, such as the retention rate or the likelihood of the performance
condition being met, the number of share awards likely to vest will need to be recalculated which will cause the value of the employer’s NIC provision to change
accordingly.
Once the share awards under each of the schemes have vested, the provision will be utilised when they are allotted to participants. Vesting will occur between
2017 and 2020.
SECTION 4 — CAPITAL STRUCTURE AND FINANCING COSTS
4.1 Borrowings
Borrowings
Non-current liabilities
The loan outstanding at period end can be analysed as follows:
3 December
2017
£m
27 November
2016
£m
243.3
243.3
—
—
Principal amount
£m
250.0
Inception
June 2017
Security
Held
Collateral
Current
Interest Rate
Instalment
Frequency
Carrying
Amount as at
3 December
2017
£m
Carrying
Amount as at
27 November
2016
£m
Final
Payment
Due
4% Semi-annually
June 2024
243.3
—
4.2 Share Capital and Premium
Accounting Policies
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Share Capital and Premium
Included in the total number of ordinary shares outstanding below are 32,803,390 (2016: 32,830,613) ordinary shares held by the Group’s Employee Benefit
Trust (see Note 4.10(b) to the consolidated financial statements). The ordinary shares held by the trustee of the Group’s Employee Benefit Trust pursuant to the
Joint Share Ownership Scheme are treated as treasury shares in the Group’s Consolidated Balance Sheet in accordance with IAS 32 ‘‘Financial Instruments:
Presentation’’. These ordinary shares have voting rights but these have been waived by the trustee. The number of allotted, called up and fully paid shares,
excluding treasury shares, at the end of each period differs from that used in the basic earnings per share calculation in Note 2.9 to the consolidated financial
statements, as basic earnings per share is calculated using the weighted average number of ordinary shares in issue during the period, excluding treasury shares.
At 3 December 2017, the number of ordinary shares available for issue under the Block Listing Facilities was 12,083,504 (2016: 13,318,184). These ordinary shares will
only become allotted when the shares under the Share Incentive Plan have been awarded or the share options under the Group’s Executive Share Ownership Scheme,
non-employee share options and Sharesave schemes have been exercised, and are therefore not included in the total number of ordinary shares outstanding.
The movements in the called up share capital and share premium are set out below:
At 29 November 2015
Issues of ordinary shares
Allotted in respect of share option schemes
At 27 November 2016
Issues of ordinary shares
Allotted in respect of share option schemes
At 3 December 2017
4.3 Share-based Payments
For more information on the Group’s share schemes, see Note 4.10 to the consolidated financial statements.
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Ordinary
Shares
Number
(million)
625.4
3.4
0.4
629.2
1.1
0.4
630.7
Ordinary
Shares
£m
Share
Premium
£m
12.6
—
—
12.6
—
—
12.6
259.0
0.6
0.5
260.1
0.9
0.6
261.6
187
Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE COMPANY
Financial Statements
4.4 Financial Instruments
Accounting Policies
Financial assets and financial liabilities are recognised on the Balance Sheet when the Company becomes a party to the contractual provisions of the instrument.
The Company classifies its financial instruments into available-for-sale, loans and receivables, and other financial liabilities at amortised cost.
The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determine the classification of their financial
instruments at initial recognition or in certain circumstances on modification.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount reported in the Balance Sheet when there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Fair Value of Financial Instruments
Set out below is a comparison by category of carrying values and fair values of all financial instruments that are included in the financial statements. The fair
values of financial assets and liabilities are based on prices available from the market on which the instruments are traded where available. The fair values of cash
and cash equivalents, receivables and payables are assumed to approximate to their carrying values but for completeness are included in the analysis below.
Financial Assets
Investments
Cash and cash equivalents
Other receivables
Total financial assets
Financial Liabilities
Trade and other payables
Senior secured notes
Total financial liabilities
3 December 2017
27 November 2016
Carrying Value
£’000
Notes
Fair Value
£’000
Carrying Value
£’000
Fair Value
£’000
3.1
3.4
3.3
3.5
4.1
512.5
117.5
386.7
1,016.7
(5.5)
(243.3)
(248.8)
512.5
117.5
386.7
1,016.7
(5.5)
(240.9)
(246.4)
505.6
14.6
244.0
764.2
(0.3)
—
(0.3)
505.6
14.6
244.0
764.2
(0.3)
—
(0.3)
4.5 Credit Risk
The Company’s exposures to credit risk arise from holdings of cash and cash equivalents and other receivables.
Exposure to Credit Risk
The carrying value of financial assets, as set out in Note 4.3, represents the maximum credit exposure. No collateral is held as security against these assets.
Cash and Cash Equivalents
The Company’s exposure to credit risk on cash and cash equivalents is managed by investing in banks and financial institutions with strong credit ratings and by
regular review of counterparty risk.
Other Receivables
Other receivables at the end of both periods consist primarily of amounts due from subsidiary undertakings. Management provide for irrecoverable debts when
there are indicators that a balance may not be recoverable.
The ageing of other receivables at the balance sheet date is set out below:
Not past due
3 December 2017
Gross
£’000
386.7
Impairment
£’000
—
27 November 2016
Gross
£’000
244.0
Impairment
£’000
—
Notes
3.3
There were no unimpaired balances at the period end where the Company had renegotiated the terms. Management have not provided for irrecoverable debts
against any of their other receivable balances.
188
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 4.6 Liquidity Risk
In the current year, the unsecured £210 million revolving facility was reduced to £100 million and extended by three years to 2022. As at 3 December 2017 the
facility has not been utilised. The Company regularly reviews its financing arrangements. The Company monitors cash flow as part of its day-to-day control
procedures and the Board considers cash flow projections on a monthly basis. The Company’s capital management policies are consistent with those of the
Group. For further details on the Group’s capital management strategy see Note 4.11 to the consolidated financial statements.
The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period at the Balance Sheet date to the
contractual maturity date. The amounts disclosed in the table are the carrying values and undiscounted contractual cash flows.
Financial Liabilities
Trade payables and other payables
27 November 2016
Financial Liabilities
Trade payables and other payables
3 December 2017
Notes
3.5
Notes
3.5
Carrying
Value
£m
Contractual
Cash Flows
£m
(0.3)
(0.3)
(0.3)
(0.3)
1 Year or
Less
£m
(0.3)
(0.3)
1–2 Years
£m
2–5 Years
£m
More Than
5 Years
£m
—
—
—
—
—
—
Carrying
Value
£m
Contractual
Cash Flows
£m
1 Year or
Less
£m
1–2 Years
£m
2–5 Years
£m
More Than
5 Years
£m
(5.5)
(5.5)
(5.5)
(5.5)
(5.5)
(5.5)
—
—
—
—
—
—
4.7 Market Risk
Currency Risk
The Company engages in foreign currency transactions to a very limited extent. No financial assets are held in foreign currencies. Due to the Company’s lack of
exposure to currency risk, no sensitivity analysis has been performed.
Interest Rate Risk
The Company has no interest bearing financial liabilities with a variable rate and its interest bearing financial assets consist of only cash and cash equivalents
and certain amounts due from subsidiary undertakings. These financial assets are exposed to interest rate risk as the Company holds money market deposits at
floating interest rates. The risk is managed by investing cash in a range of cash deposit accounts with UK banks split between fixed-term deposits, notice accounts
and money market funds.
At the balance sheet date the interest rate profile of the Company’s interest bearing financial instruments was:
Fixed Rate Instruments
Financial assets
Financial liabilities
3 December
2017
£m
27 November
2016
£m
117.5
(243.3)
14.6
—
Sensitivity Analysis
An increase of 100 basis points (1.0%) in interest rates would impact equity and profit or loss by the amounts shown below. A rate of 100 basis points was deemed
appropriate, considering the current short-term interest rate outlook. The calculation applies the increase to average floating rate interest bearing borrowings
and cash and cash equivalents existing during the period. This analysis assumes that all other variables remain constant and considers the effect on financial
instruments with variable interest rates.
Equity
Result
Income
Gain
3 December
2017
£m
27 November
2016
£m
—
0.4
—
—
189
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Our FinancialsStock Code: OCDO | www.ocadogroup.com NOTES TO THE COMPANY
Financial Statements
4.8 Financial Instruments by Category
The Company has categorised its financial instruments as follows:
As at 27 November 2016
Financial Assets
Investments
Cash and cash equivalents
Other receivables
Total
Financial Liabilities
Trade and other payables
Total
As at 3 December 2017
Financial Assets
Investments
Cash and cash equivalents
Other receivables
Total
Financial Liabilities
Trade and other payables
Total
Available-
For-Sale
£m
Loans and
Receivables
£m
Notes
Other Financial
Liabilities at
Amortised Cost
£m
3.1
3.4
3.3
3.5
505.6
—
—
505.6
—
—
—
14.6
244.0
258.6
—
—
—
—
—
—
(0.3)
(0.3)
Available-
For-Sale
£m
Loans and
Receivables
£m
Notes
Other
Financial
Liabilities at
Amortised Cost
£m
3.1
3.4
3.3
3.5
512.5
—
—
512.5
—
—
—
117.5
386.7
504.2
—
—
—
—
—
—
(5.5)
(5.5)
Total
£m
505.6
14.6
244.0
764.2
(0.3)
(0.3)
Total
£m
512.5
117.5
386.7
1016.7
(5.5)
(5.5)
4.9 Capital Management
The Board’s objectives and policies for the Company are consistent with those of the Group. Full details are provided in Note 4.11 to the consolidated financial statements.
190
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 SECTION 5 — OTHER NOTES
5.1 Related Party Transactions
Key Management Personnel
Only the Executive and Non-Executive Directors are recognised as being key management personnel. It is the Board which has responsibility for planning, directing
and controlling the activities of the Company. Executive and Non-Executive Directors did not receive any remuneration for their services to the Company.
Directors’ interests in ordinary shares of the Company are disclosed in the Directors’ Remuneration Report on page 98.
There were no material transactions or balances between the Company and its key management personnel or members of their close family. At the end of the
period, key management personnel did not owe the Company any amounts.
Subsidiaries
The Company enters into loans with its subsidiaries. No interest was earned on these loans at market-related interest rates during the period (2016: £2,000).
Transactions with Subsidiaries
Group share-based payments
Increase in loans made to subsidiary undertakings
(Decrease)/increase in amounts due to subsidiary undertakings
Year End Balances Arising from Transactions with Subsidiaries
Receivables:
Loans and receivables due from subsidiaries
Payables:
Loans and receivables due to subsidiaries
5.2 Post Balance Sheet Events
There were no events after the balance sheet date which require adjustment to or disclosure in these financial statements.
53 Weeks
Ended
3 December
2017
£m
52 Weeks
Ended
27 November
2016
£m
6.9
142.1
(0.1)
7.1
3.6
0.1
3 December
2017
£m
27 November
2016
£m
386.5
244.0
(0.6)
(0.3)
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191
Our FinancialsStock Code: OCDO | www.ocadogroup.com 192
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 ADDITIONAL
Information
Glossary
Alternative Performance Measures
Five Year Summary
Financial Calendar
Company Information
194
196
197
198
198
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193
Additional InformationStock Code: OCDO | www.ocadogroup.com 25615 Proof 8 6 February 2018 1:40 AMGLOSSARY2014 ESOS – means the Ocado 2014 Executive Share Option Scheme.2016 Code – means the UK Corporate Governance Code published by the FRC in April 2016.Active Customers – means customers who have shopped with Ocado in the previous 12 weeks.Administrative Expenses – means all IT costs, advertising and marketing expenditure, employment costs of all head office functions, which include legal, finance, human resources, marketing and procurement, rent and other property-related costs for the head office, all fees for professional services and the depreciation, amortisation and impairment associated with head office IT equipment, software, fixtures and fittings and expenses relating to the Group’s share schemes.Admission – means the admission of the ordinary shares of the Company to the premium listing segment of the Official List and to trading on the London Stock Exchange’s main market for listed securities which occurred on 26 July 2010.AGM – means the Annual General Meeting of the Company, which will be held on 2 May 2018 at 10 am at Peterborough Court, 133 Fleet Street, London, EC4A 2BB.American Depositary Receipts – means securities that have been created to permit US investors to hold shares in non-US companies and, in a Level 1 programme, to trade them on the over-the-counter market in the United States.Annual Incentive Plan or AIP – means the Executive Director incentive plan for the Group applicable to a particular financial year.Articles – means the articles of association of the Company.Beauty MIP – means the management incentive plan for key management of Marie Claire Beauty Limited.Board – means the Board of Directors of the Company or its subsidiaries from time to time as the context may require.Brexit – means the UK’s decision to leave the European Union following the referendum on 23 June 2016.Chairman’s Share Matching Award – means a one-off award of shares to Lord Rose, made in May 2013.Cash LTIP – means the Company’s cash-based Long Term Incentive Plan for senior employees.Code – means the UK Corporate Governance Code published by the FRC in September 2014.Companies Act – means the Companies Act 2006.Company – means Ocado Group plc, a company incorporated in England and Wales with registered number 07098618 whose registered office is at Buildings 1 & 2 Trident Place, Hatfield Business Park, Mosquito Way, Hatfield, Hertfordshire, AL10 9UL. Corporate Website – means www.ocadogroup.com.CR – means Corporate Responsibility.CSTM – means Customer Service Team Member, the title given to our customer facing delivery drivers.Customer Fulfilment Centre or CFC – means a dedicated highly automated warehouse used for the operation of the business. The CFCs are: CFC1 in Hatfield, CFC2 in Dordon, CFC3 in Andover and CFC4 in Erith (under construction).Deloitte – means Deloitte LLP, the Group's statutory auditor or the Group's advisers in respect of non-audit services.Directors – means the Directors of the Company whose names and biographies are set out on pages 116 and 117 with the exception of Alex Mahon who was a director of the Company during the period but who retired from the Board following the period end, and Luke Jensen, who will join the Board with effect from 1 March 2018 or the Directors of the Company’s subsidiaries from time to time as the context may require.Directors’ Remuneration Policy – means the Directors’ remuneration policy that the Company which was approved by shareholders at the 2017 annual general meeting and which is set out on pages 74 to 90.2014 Directors’ Remuneration Policy – means the Directors’ remuneration policy which was approved by shareholders at the 2014 annual general meeting and which is set out on pages 87 to 97 of the 2015 annual report and accounts and on the Company’s corporate website at www.ocadogroup.com. Disclosure Guidance and Transparency Rules – means the disclosure guidance and transparency rules made under Part VI of the Financial Services and Markets Act 2000 (as amended).Distribution Costs – means all the costs incurred, excluding product costs, to the point of sale, usually the customer’s home. This includes the payroll-related expenses for the picking, dispatch and delivery of product sold to the point of sale, the cost of making those deliveries, including fuel, tolls, maintenance of vehicles, the operating costs of the properties required for the picking, dispatch and onward delivery operations and all associated depreciation, amortisation and impairment charges, call centre costs and payment processing charges.DPV – means deliveries per van per week.EBITDAA – means the non-GAAP measure which Ocado has defined as earnings before net finance costs, taxation, depreciation, amortisation, impairment and exceptional itemsA.EBT – as relating to the Income Statement, means earnings before tax. As relating to share schemes, means employee benefit trust. EBT Trustee – means the trustee from time to time of the employee benefit trust established for the purposes of the JSOS, currently Estera Trust (Jersey) Limited.EPS – means earning per share.ESOS – means the HMRC-approved Ocado 2001 Executive Share Option Scheme and the Ocado 2001 Non-HMRC approved Executive Share Option Scheme.Exceptional ItemsA – means items that due to their material and non-recurring nature have been classified separately in order to draw them to the attention of the reader of the financial statements.Executive Directors – means Tim Steiner, Neill Abrams, Duncan Tatton-Brown and Mark Richardson.Fabled.com – means the Group’s premium beauty online store in collaboration with Marie Claire and Time Inc. Fetch.co.uk – means the Group’s dedicated online pet store.Financial Period – means the 52-week period, or 53-week period where relevant, ending the closest Sunday to 30 November.Financial Year or FY – see Financial Period.FRC – means the Financial Reporting Council.GAAP – means generally accepted accounting principles.GDPR – means General Data Protection Regulation.GHG – means greenhouse gas(es).GIP – means the Growth Incentive Plan.GMDC – means the General Merchandise Distribution Centre in Welwyn Garden City, a dedicated highly automated warehouse used for the operation of the business.GPP – means the Ocado Group Pension Plan.Gross SalesA – means sales (net of returns), including charges for delivery, before deducting relevant vouchers, offers and value added tax. Relevant vouchers and offers include money-off coupons, conditional spend vouchers and multi-buy offers, such as buy three for the price of two. This includes sales from ocado.com, fetch.co.uk, sizzle.co.uk and fabled.com.See Alternative Performance Measures on page 196A194Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017Ocado Annual Report 2017 Financials.indd 19406/02/2018 14:41:26 Group – means Ocado Group plc, its subsidiaries,
significant undertakings and affiliated companies
under its control or common control.
HMRC – means Her Majesty’s Revenue & Customs.
IAS – means International Accounting Standard(s).
IFRIC – means International Financial Reporting
Standards Interpretations Committee.
IFRS – means International Financial Reporting
Standard(s).
IGD – means the Institute of Grocery Distribution.
IP – means Intellectual Property.
ISA (UK & Ireland) – means International
Standard on Auditing in the UK and Ireland.
John Lewis – means John Lewis plc, the parent
company of Waitrose, incorporated in the UK with
registered number 233462 whose registered office
is at 171 Victoria Street, London, SW1E 5NN.
JSOS – means the Group’s Joint Share Ownership
Scheme. It comprises three issues called JSOS1,
JSOS2 and JSOS3.
KPI – means key performance indicators.
KPMG – means KPMG LLP.
LIBOR – means the London Interbank Offered
Rate.
Listing Rules – means the Listing Rules made
by the UK Listing Authority under Part VI of the
Financial Services and Markets Act 2000 (as
amended).
LPP – means Low Price Promise, the Ocado
vouchering scheme which entitles customers to
receive discount vouchers where their shopping
basket has cost more than it would have at
selected competitors.
LTIP – means the Company’s Long Term Incentive
Plan for Executive Directors and selected senior
managers.
Management Committee – means senior
management responsible for managing the day-
to-day operations of the business.
MHE – means mechanical handling equipment.
MHE JVCo – means MHE JVCo Limited, a company
incorporated in the UK with registered number
8576462, whose registered office is at Buildings 1 &
2 Trident Place, Hatfield Business Park, Mosquito
Way, Hatfield, AL10 9UL. MHE JVCo is jointly
owned by a Group subsidiary and Morrisons.
Morrisons – means Wm Morrison Supermarkets
PLC, a company incorporated in the UK with
registered number 353949, whose registered office
is at Hilmore House, Gain Lane, Bradford, West
Yorkshire, BD3 7DL.
Morrisons.com – means Morrisons’ online retail
business.
Net Finance Costs – means finance income
less finance costs. Finance income is composed
principally of bank interest and other interest.
Finance cost is composed of interest on bank
loans and overdrafts, interest on finance leases
and interest on other financing arrangements.
Non-Executive Directors – means the non-
executive Directors of the Company designated as
such on page 52.
Notice of Meeting – means the notice of the
Company’s AGM.
Ocado.com – means the Group’s online retail
business.
Ocado Council – means the Ocado forum used to
consult with our employees.
Ocado Smart Platform or OSP – means the end-
to-end solution for operating online in the grocery
market, which has been developed by the Group.
Ocado Solutions - means the Group's Solutions
business.
OPW – means orders per week.
Other Income – means primarily revenue for
advertising services provided by Ocado to
suppliers and other third parties on the Webshop,
commission income and sublease payments.
Other income is recognised in the period to which
it relates on an accruals basis.
Participants – means eligible staff who
participate in one of the Company’s staff share
schemes.
Prospectus – means the Company’s prospectus
dated 6 July 2010 prepared in connection with the
Company’s Admission.
PwC – means PricewaterhouseCoopers LLP, the
Group’s former statutory auditor or the Group’s
advisers in respect of non-audit services.
R&D – means Research and Development.
Revenue – means online sales (net of returns)
through the Webshop and Ocado on the Go,
including charges for delivery, but excluding
relevant vouchers, offers and value added tax. The
recharge of costs to Morrisons and fees charged
to Morrisons and other solutions clients are also
included in Revenue. Relevant vouchers and offers
include money-off coupons, conditional spend
vouchers and multi-buy offers, such as buy three
for the price of two.
Senior Secured Notes or Notes - means the
Company's offering of £250 million Senior Secured
Notes due 2024 at a coupon of 4% and an issue
price of 100%. For more details, see page 113.
Shareholder – means a holder for the time being
of ordinary shares in the Company.
Sharesave Scheme or SAYE Scheme – means
the Ocado employee savings-related share option
plan approved by HMRC.
SIP – means the Share Incentive Plan.
Sizzle.co.uk – means the Group’s dedicated
online kitchen and dining store.
SKU – means a “stock keeping unit”, that is each
line of stock.
Smart Pass (previously Saving Pass) – means
the Ocado pre-pay membership scheme which
includes the delivery pricing scheme previously
known as Delivery Pass and the discount
membership scheme formerly known as Saving
Pass.
Sourcing Agreement – means the various
sourcing and branding agreements between
Ocado, Waitrose and John Lewis.
Spoke – means the trans-shipment sites used for
the intermediate handling of customers’ orders.
Substitution – means an alternative product
provided in place of the original product ordered
by a customer.
TSR – means total shareholder return – the
growth in value of a shareholding over a specified
period, assuming that dividends are reinvested to
purchase additional units of the stock.
UPH – means average units processed per labour
hour.
USDAW – means the Union of Shop, Distributive
and Allied Workers.
Waitrose – means Waitrose Limited, a company
incorporated in the UK with registered number
00099405, whose registered office is at 171 Victoria
Street, London, SW1E 5NN.
Webshop – means the customer facing
internet-based virtual shop accessible via the
websites www.ocado.com, www.fabled.com,
www.fetch.co.uk and www.sizzle.co.uk.
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195
Additional InformationStock Code: OCDO | www.ocadogroup.com ALTERNATIVE
Performance Measures
The Group assesses its performance using a variety of alternative performance
measures which are not defined under IFRS and are therefore termed “non-GAAP”
measures. These measures provide additional useful information on the underlying
trends, performance and position of the Group. The non-GAAP measures we used are:
• 52 Week Comparative for the 2017 Financial Year;
• Gross Sales;
• Segment Revenue;
• Exceptional Items;
• Segment Administrative Costs and Distribution Costs;
• EBITDA;
• Segment EBITDA;
• External Gross Debt; and
• Net Debt.
A reconciliation from these non-GAAP measures to the nearest measure prepared
in accordance with IFRS is presented below. The alternative performance measures
used may not be directly comparable with similarly titled measures used by other
companies.
52 Week Comparative for the 2017 Financial Year
As a predominately retail business, the business has a 53 week financial year every
5–6 years. The business have removed the last trading week of the 2017 financial year
to aid comparability for the users. These comparable numbers are not highlighted
throughout the report.
Gross Sales
Gross Sales is a measure of reported revenue before excluding value added tax and
relevant vouchers and offers. Gross Sales is a common measure used by investors
and analysts to evaluate the operating financial performance of companies within the
retail sector.
A reconciliation from reported revenue to Gross Sales can be found in Note 2.3 to the
consolidated financial statements.
Segment Revenue/Revenue (Retail)/Revenue (Solutions)
Segment revenue is a measure of reported revenue for the Group's Retail and
Solutions segments. A reconciliation of revenue for the segments to revenue for the
Group can be found in note 2.2 to the consolidated financial statements.
Exceptional Items
The Group’s Consolidated Income Statement separately identifies trading
results before exceptional items. The Directors believe that presentation of the
Group’s results in this way is relevant to an understanding of the Group’s financial
performance. This presentation is consistent with the way that financial performance
is measured by management and reported to the Board and assists in providing
a meaningful analysis of the trading results of the Group. This also facilitates
comparison with prior periods to assess trends in financial performance more readily.
The Group applies judgement in identifying significant non-recurring items of income
and expense that are recognised as exceptional to help provide an indication of
the Group’s underlying business. In determining whether an event or transaction
is exceptional in nature, management considers quantitative as well as qualitative
factors such as the frequency or predictability of occurrence.
Examples of items that the Group considers exceptional include, but are not
limited to, material costs relating to the opening of a new warehouse, corporate
reorganisations, material litigation, and any material costs, outside of the normal
course of business as determined by management.
Exceptional items are disclosed in Note 2.7 to the consolidated financial statements.
Segment Administrative Costs and Distribution Costs
Segment distribution and administrative costs are measures which seek to reflect
the performance of the Group’s segments in relation to the long-term sustainable
growth of the Group. These measures exclude the impact of certain costs that are not
allocated to a segment; depreciation, amortisation, impairment and other central
costs.
196
A reconciliation from reported distribution and administrative costs, the most directly
comparable IFRS measures, to the segment distribution and administrative costs, is
set out below.
Retail distribution and administrative costs
Solutions distribution and administrative costs
Unsegmented distribution and
administrative costs
Reported distribution costs
Reported administrative expenses
2017
£m
356.1
115.1
80.7
551.9
2017
£m
434.2
117.7
551.9
2016
£m
301.4
93.9
71.0
466.3
2016
£m
365.7
100.6
466.3
EBITDA
In addition to measuring its financial performance based on operating profit, the
Group also measures performance based on EBITDA. EBITDA is defined as the
Group earnings before depreciation, amortisation, impairment, net finance expense,
taxation and exceptional items. EBITDA is a common measure used by investors and
analysts to evaluate the operating financial performance of companies.
The Group considers EBITDA to be a useful measure of its operating performance
because it approximates the underlying operating cash flow by eliminating
depreciation and amortisation. EBITDA is not a direct measure of liquidity, which is
shown by the cash flow statement, and needs to be considered in the context of the
Group's financial commitments.
A reconciliation from operating profit to EBITDA can be found on the face of the
Consolidated Income Statement on page 127.
Segment EBITDA/EBITDA (Retail)/EBITDA (Solutions)
The financial performance of the Group's segments is measured based on EBITDA, as
reported internally.
A reconciliation of EBITDA for the segments to EBITDA for the Group can be found in
note 2.2 to the consolidated financial statements.
External Gross Debt
External gross debt consists of loans and other borrowings (both current and non-
current), less finance leases payable to joint venture interests of the Group.
External gross debt is a measure of the Group’s indebtedness to third parties which
are not considered a related party to the Group.
A reconciliation from external gross debt to gross debt can be found below.
External gross debt
Finance leases relating to joint ventures
Gross debt
2017
£m
283.9
94.1
378.0
2016
£m
107.1
108.7
215.8
Net Debt
Net debt consists of loans and other borrowings (both current and non-current), less cash
and cash equivalents. Loans and other borrowings are measured as the net proceeds
raised, adjusted to amortise any discount over the term of the debt.
Net debt is a measure of the Group’s net indebtedness that provides an indicator of the
overall balance sheet strength. It is also a single measure that can be used to assess the
combined impact of the Group’s cash position and its indebtedness. The use of the term
“net debt” does not necessarily mean that the cash included in the net debt calculation is
available to settle the liabilities included in this measure.
Net debt is considered to be an alternative performance measure as it is not defined in IFRS.
The most directly comparable IFRS measure is the aggregate of loans and other borrowings
(current and non-current) and cash and cash equivalents. A reconciliation from these
measures to net debt can be found in Note 4.4 in the consolidated financial statements.
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017 FIVE YEAR
Summary
Trading Weeks
Gross Sales A
Revenue
Gross Profit
EBITDA A
Adjusted operating profit
1. Adjusted to exclude exceptional items A and share of result from joint venture.
Average orders per week
Average order size (£)1, 2
CFC Efficiency (UPH)3
DPV/week
Product waste (%)
53 Weeks to
3 December
2017
£m
52 Weeks to
27 November
2016
£m
52 Weeks to
29 November
2015
£m
52 Weeks to
30 November
2014
£m
52 Weeks to
1 December
2013
£m
53
1,601.4
1,463.8
504.3
86.0
13.4
52
1,386.7
1,271.0
435.3
84.3
21.9
52
1,204.4
1,107.6
375.1
81.5
19.1
52
1,026.5
948.9
312.9
71.6
14.2
52
852.4
792.1
247.5
45.8
1.0
53 Weeks to
3 December
2017
52 Weeks to
27 November
2016
52 Weeks to
29 November
2015
52 Weeks to
30 November
2014
52 Weeks to
1 December
2013
264,000
107.28
164
182
0.7
230,000
108.10
160
176
0.7
195,000
111.15
155
166
0.7
167,000
112.66
145
163
0.8
143,000
113.53
135
160
1.0
1. Refers to Ocado.com orders and includes standalone orders for Fetch.co.uk, Sizzle.co.uk and Fabled.com. This is after cancelled orders are deducted.
2. Average order size excludes destination sites from 2014 onwards, prior to this destination sites were not material.
3. Mature CFC operations (CFC is considered mature if it had been open 12 months by the start of the half year reporting period).
A
See Alternative Performance
Measures on page 196
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197
Additional InformationStock Code: OCDO | www.ocadogroup.com FINANCIAL
Calendar
20 March 2018
2 May 2018
10 July 2018
18 September 2018
13 December 2018
5 February 2019
Q1 Trading Statement
Annual General Meeting
Half Year Results Announcement
Q3 Trading Statement
Q4 Trading Statement
Final Results Announcement
COMPANY
Information
Registered office:
Buildings One & Two
Trident Place
Mosquito Way
Hatfield
Hertfordshire
AL10 9UL
Company number:
07098618
Independent auditors: Deloitte LLP
Registrars:
2 New Street Square
London
EC4A 3BZ
Link Market Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4ZF
All Intellectual Property Rights in the content and materials in this Annual Report vests in and are owned absolutely by Ocado unless otherwise indicated, including in respect of or in
connection with but not limited to all trade marks and the Report’s design, text, graphics, its selection and arrangement.
Sobeys is a trade mark of Sobeys Inc.
Casino and Groupe Casino are trade marks of Casino, Guichard-Perrachon
Morrisons is a trade mark of Wm Morrisons Supermarkets plc
Oxbotica, Selenium and Caesium are trade marks of Oxbotica Limited
Copyright © Ocado 2018
198
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Ocado Group plc | Annual Report and Accounts for the 53 weeks ended 3 December 2017
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This Annual Report is printed by an FSC® (Forest Stewardship Council)
certified printer using vegetable-based inks.
This report has been printed on Magno silk, a white coated paper and
board using 100% EFC pulp.
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Ocado Group plc
Buildings One & Two
Trident Place
Mosquito Way
Hatfield
Hertfordshire
AL10 9UL
United Kingdom
Tel: +44(0) 1707 227800
Fax: +44(0) 1707 227999
www.ocadogroup.com
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