Welcome to Ocado's full year results for financial year 2022. As Tim said in his quote, earlier, during the past year, every company has had its business model tested by a combination of macroeconomic and geopolitical headwinds. You look at our retail business, it's had to deal with a COVID unwind, accelerated by a once in a generation consumer crisis, spending crisis. All the while having to position themselves for future growth. You look at our technology solutions business, it's being asked to scale very rapidly for our partner clients to build CFCs in multiple geographies, to sign new contracts, and all the while innovating at pace to be well ahead of the competition. It's had to achieve that in the face of incredibly challenging supply chains high inflation and other macro pressures.
As you're gonna hear, actually the company has risen to the challenge, due in large part to the creativity and commitment of the Ocado people. I, along with the board, share Tim's sentiment that we have more belief in our model than ever before. I once described Ocado as a cauldron of creativity, and I think it's a phrase which is worth bearing in mind as you listen to this and you start thinking about the future of the company. It's that culture of creativity that drives game-changing innovation, that defines Ocado Reimagined. That is already delivering for us and our partners in terms of lower OpEx, lower CapEx, better returns. It turns tech R&D into tangible investor returns, as you'll also hear, into opportunities beyond the grocery sector.
Over the next 45 minutes, you're gonna hear from Tim, Stephen, and others, who will give you a sense of how that's gonna play out over the next year and beyond. I hope you enjoy the session. I very much hope that you walk away as excited as I am about the possibilities of this company. Tim, Stephen, over to you.
Rick, thank you, welcome everyone. A few thoughts from me before we go to the numbers. It's been a challenging year, as we mentioned, for Ocado Retail, with baskets reflecting the COVID unwind and accelerated by the cost of living crisis. However, there's been a lot of progress that I'd like to highlight. First is the rapid rollout of CFCs. You know, we now have more international CFCs than we have here in the UK. We've built up dedicated client support teams that are now helping our partners achieve even more from their new CFCs. We've had new partner wins, we exit the year and start the new year with a strong pipeline.
Our early adopters are taking some time to absorb their early learnings, as well as new optimizations from Ocado Reimagined, the new opportunities from that. We have a high conviction of future growth as those clients absorb their early learnings, take advantage, and look at what we can bring with Ocado Reimagined to future facilities. The Ocado Reimagined benefits are now tangible, and we can show a clear link between the technology R&D and our future financial returns, and the financial returns of our clients, including our optimized site design. Our balance sheet has been strengthened, providing the capital for our future growth. We have the imminent launch of our new capital light, highly efficient, automated fulfillment solution for use outside of E-commerce grocery.
Before talking about some of these topics in more detail. I'm gonna ask Stephen to take you through the FY 2022 numbers.
Thank you, Tim. Morning, everybody. Okay, a lot of materials to get through. I'll probably move at a reasonable pace. Next slide, please. The agenda for the next 15, 20 minutes or so, take you through the numbers. First of all, the current reported segments, you'll see these for the last time. The pro forma new segments that we talked about. We trialed on a couple of occasions last year at our accounting seminar and cash flow seminar in May and November. There's the new segments. Ocado Retail, no change there. UK Logistics, just a straightforward logistics business. Technology Solutions, combining the UK and international side of the solutions business. Next slide, please. Next slide. Okay. Here are the results. Revenue, GBP 2.5 billion, slightly up on last year's number.
A couple of things going on within that revenue number. First of all, Ocado Retail down 4%. You heard about this number at the Q4 trading update that we gave you a few weeks back. Strong customer growth coming through, but offset by smaller shopping baskets
Primarily due to the COVID comparables, but also the impact of inflation on the consumer in the UK. Strong growth in our solutions revenue, reflecting ongoing rollout of OSP for our partners. International solutions grew by 122%, with 12 CFCs live now at year-end. UK solutions and logistics grew by 13% and a growing solutions fee revenue within that number, reflecting continued capacity rollout for the UK partners, the cost recharges up in logistics despite lower volumes impacted by that high inflation. There was an EBITDA loss of GBP 74 million, largely driven that decline year-on-year by the decline in Ocado Retail.
A loss before tax reflecting that EBITDA performance, but also with an elevated level of depreciation as our capital base continues to grow as we invest in CFCs around the world. Just reinforcing Tim's point, healthy liquidity of GBP 1.6 billion that follows the June equity raise and the undrawn revolving credit facility of GBP 300 million. We've got healthy liquidity to support our ambitious growth plans and to meet our cash needs for the years ahead until we turn cash flow positive. Next slide. Here's how the numbers map from on the left-hand side, the old now reporting segments, to the new segments on the right. Revenue, how the GBP 2,514 is now allocated across those three businesses and similarly EBITDA on the bottom right-hand corner there.
I'm now gonna provide commentary on the fiscal 2022 results on these new segments, and I'm gonna give guidance for fiscal 2023 on the new segments as well. I think you'll find that helpful. Next slide, please. Moving on to Ocado Retail. Next slide. Ocado Retail, 3.8% revenue decline. I've gone through some of the dynamics there. We're gonna see the numbers in a second. There's an improving trend in Ocado Retail. We saw that in the second half of last year. We're seeing that in the early months of this year as well. It's an encouraging trend of growth, revenue growth, on the back of that customer order growth that we're focusing on right now. Sorry, customer growth we're focusing on right now to fill that capacity that we have that's surplus.
We're outperforming in the market in the bigger online channel with a share of online improving to 12%, just over 12% from 11.7% previously. The U.K. online share is stabilizing around 11% at the moment. An EBITDA of a small loss of GBP 4 million reflects those current cost pressures. We're gonna see the breakdown of that in a subsequent slide. Next slide, please. Here are those revenue dynamics that I mentioned. Strong growth in active customers, up 13% to 940,000. Driving that growth in average orders per week, but at the same time, the smaller shopping basket, 46 items on average in the year compared to 52 the previous year. Selling price though, up 4.5%.
Our sales prices remain at industry lows compared to pretty chunky sales price increases in the rest of the grocery sector, supporting that drive for customer growth. Next slide, please. Here are the three key drivers of the margin pressure that we've seen during fiscal 22. You'll be familiar with these. Number one, the operating leverage. The fact that we have capacity available for 600,000 orders per week, just over 600,000. With Luton going live in the second half of the year, that will push us to around 700,000 orders per week. The moment we're doing around 400,000 orders per week.
The cost of that surplus capacity, the fixed cost of opening and running and maintaining, the minimum fixed cost for a Customer Fulfilment Centre represent 35% of the margin pressure, the gap between where we are today and the mid-single digit EBITDA margin. 25% of that pressure is due to marketing spend, sensible marketing spend to drive customer acquisition, grow those orders, fill that capacity, which also therefore addresses the operating leverage point. Finally, the cost of inflation, the energy costs that we've all seen and heard about in electricity, in diesel, dry ice for us as well. All of those in their own way are getting back to more normal levels of pricing and costing. Again, that we expect that to wash out in time.
The path to improvement there is in the little box on the right-hand side. I've pretty much talked around all of those key dynamics, which give us that confidence to that high mid-single digit EBITDA margin in the near term. It's gonna be quite a journey. There's a lot of capacity to fill. There's a very clear roadmap there. I think the strongest signal of delivery around this is the growing customer numbers, continue to grow at a very healthy pace. Next slide, please. U.K. logistics. U.K. logistics, a relatively simple business. It's a cost pass-through business. We pass through all the costs to either Ocado Retail or to Morrisons.
There's a management fee of around 4%. The goal here really is to bring down this cost base and bring down revenues, but still grow our volumes, because that's then a more efficient operation for our two customers. Revenue actually grew by 10.8% despite the decline in volumes through our logistics business, driven by that high cost inflation that I talked about earlier that's affecting Ocado Retail. Okay? The EBITDA number, I should have mentioned by the way, there's a bit of noise in the P&L account in the capital recharges. Above the line are the shared sites, the cost of the capital recharges for shared sites that's, Dordon and Erith. Below the line is the capital recharges for the exclusive to ORL sites.
In particular, that's Andover and Bristol, that are now shown below the line as income rather than above the line, which explains this GBP 5 million decline in EBITDA. When you wash those things through, it's neutral economics on capital recharges. Really important point to make. Next slide, please. Technology solutions. Technology solutions, revenue grew by 59%. Revenue is now at GBP 291 million in fiscal 2022. As you'll have read, we're guiding today for that revenue to grow by over 40% in fiscal 2023. Key point here, GBP 264 million of that GBP 291 million are recurring fees for installed live modules.
The balance is made up of the release to the profit and loss account of previous cash receipts from customers in respect of the set-up costs when they've joined the relationship on the Ocado Smart Platform and their contribution towards capital expenditure that we incur as well. That goes on the balance sheet on day one. It gets released to the profit and loss account over time, and that makes up the difference between the 264 and the 291. EBITDA of GBP 72 million loss is a GBP 9 million improvement on fiscal 2021. We're gonna see shortly there's a very attractive and improving contribution margin from those revenues that will only grow further as direct operating costs come down and fee rates go up as we deliver the Reimagined products.
Technology and group support costs are that deduction from that contribution margin, GBP 252 million. A pretty chunky increase versus fiscal 2021. Ongoing developments and investments in Ocado Reimagined as a key driver of that and the delivery of those during fiscal 2022, 2023 and beyond. In group support costs, investment to bring our processes and our systems up to date where they should be. We put in Oracle Fusion last year for finance. We've extended that into MRP. We put in a new treasury banking system. Around the group, we're investing in systems and processes to modernize Ocado to get it ready for that global world that it will be operating within. Next slide, please. On the left-hand side here, we show the evolution of live modules around the world.
The green shaded is the UK, international is in blue. 99 live modules now at the end of fiscal 2022. Why are modules important? When modules go live, they start generating those recurring fees for our solutions business. That's a really important growing number for us. The split there is on the fiscal 2022, that's 38 international, 61 UK. On the right-hand side is the mix of modules that are on the Ocado Smart Platform, over 71%. Why is that important? That's important because modules on OSP deliver far greater productivity than those on our older legacy sites. That productivity justifies a higher fee rate, which again drives the revenue for our solutions business. A really important and improving mix. Really important strap line here, a secure and visible recurring revenue base that's building rapidly.
We don't have to start every year from a zero position. We have locked-in recurring fees, dependable, reliable and growing. Next slide, please. The contribution margin, I referenced that just a little while ago. Improvement from 56% to 63%. Again, that will only improve further. Key trajectory here, the direct operating costs. These are largely the cost of the engineering support on-site at the CFC, the Ocado engineering support, and then the cloud costs to run and maintain the OSP platform for our partner sites. Improving from 2.7% of sales in 2021 to 2% in fiscal 2022, giving us really good confidence around that 1.5% that we've guided to for where we think we can take this to.
The more we understand this space, the more we learn about it, the more we might be ready shortly to be even more ambitious on that particular target. Again, driving an improvement in contribution margin. Next slide. Group support costs. This will be a key focus for us over the next two- three years. GBP 89 million in fiscal 2021. There's investments that I talked about Get into fiscal 2022, GBP 122 million. What we're doing with our group support costs as well, this is important to take into account and include in all your numbers in your modeling. We're now presenting technology solutions on a fully costed basis. We're transferring from the previous technology cash spend, group IT, laptops, servers, and so on, and then the InfoSec teams, the cybersecurity teams over into group support costs.
That's GBP 26 million off the GBP 344 million that you saw back in November and May for technology spend. We're also taking on board the group and other costs. That's the cost of the board, not just the non-exec directors, but the executive directors as well, and things like share-based payment schemes are also included within that number. We're addressing these. You'll have seen a couple of initiatives that we took well first of all back in October last year, in January of this year, some headcount reductions that we announced, around 250 million in total, across a variety of areas in the group, largely in platform. People. Sorry? Sorry, 1,050 people. People, sorry.
That will deliver around GBP 50 million of savings, you know, to impact the fiscal 2022 cost base. The goal here is to get these fully costed group costs down to around GBP 130 million by the midterm, which is consistent with that guidance that we gave in last year around group support costs. Much to do in this space, but we can see the route ahead. Next slide. Continued investments in technology spend. I mentioned around the Ocado Reimagined innovations that we're delivering and if not ready for market, getting ready for market. GBP 344 million of cash spend. 40% of that goes to the profit and loss account, and 60% is capitalized on our balance sheet.
The cost base for fiscal 2023 will reflect the new segmental cost allocations. We're now building from a fiscal 2022 pro forma of GBP 308 million. That's a GBP 36 million reduction from the previous number that I just referenced. We continue to target GBP 200 million technology cash spend to run OSP in the midterm. Of course, qualifying that should a new exciting opportunity come along, we should be ready to invest in that where we see value creation opportunities. Next slide, please. When we look at the new segments on a fully costed basis, you can see there on the left-hand side, the fiscal 2022 pro forma seminar. New segments, technology solutions, and the midterm guidance.
Midterm guidance for technology solutions, we're looking at revenue greater than GBP 1.1 billion. We're looking at a contribution on that revenue of over GBP 750 million. Central costs at around GBP 200 million. That's stable in real terms on fiscal 2021 costs, and we've broken down on the right-hand side how that works. That's our guidance for the midterm. The following CapEx commentary that's about to follow, we're presenting that on a basis that's consistent with the fully costed cost base I've just outlined here, and it's also outlined with the November 2022 cash flow seminar. Next slide, please. Thanks. CFC CapEx and technology investment, they're broken down here on the left-hand side of that fiscal 2022 column.
GBP 449 million of CFCs and technology development and innovation spend of GBP 228 million. On the CFCs, about GBP 100 million of that is in relation to the UK. The balance is in respect of international sites, we're gonna see shortly a breakdown of that and the drivers of the phasing of that spend. What else? I think that slide pretty much speaks for itself. Again, just to reinforce the point, we made this at the cash flow seminar in November. We're targeting this spend to deliver a return on capital employed in excess of 40%. Next slide, please. Trying to show on this slide how to put more detail around the CapEx spend of GBP 449 million across those UK and international CFCs in fiscal 2022.
This slide on the left here shows the activity of the CapEx. The CapEx was deployed in terms of the CFCs. 21 CFCs where capital was spent in fiscal 2022. Year two is the year of go live. Year one is the year of go live, one year before go live. The key point here is a big chunk of spend is in respect of year of go live and the year after that, and the year before that. We break down then the cost of GBP 449 million that way.
You can see the front phasing of our CapEx, 41% in the year of go live, 32% the year before, and a particularly elevated level of 17% earlier than that during fiscal 2022. I would like to regard that as a unique set of circumstances driving that high level of spend so far ahead of go live. The explanation here on the right-hand side is an attempt to summarize what that was all about. Supply chain challenges, mitigating those supply chain challenges, and building up stock levels to deliver those CFCs on time as required by our clients. Maturity of the purchasing programs. Another process we've just put in place and formalized is sales and operations planning. The MRP, material requirement planning platform in Oracle enables that. That will help our procurement planning.
We're carrying pretty large durations, and I referenced this, I think, at the November cash flow seminar on the inventory today kit for our CFCs. 50% of other spend includes the upfront purchase of NHE to be deployed to future sites. An important part of detail, I think, to explain that elevated CapEx number, but also provides confidence around the CapEx number for fiscal 2023 that we're guiding of GBP 250 million lower than the fiscal 2022 number. Which, of course, is important to our cash flow trajectory. Next slide. The guidance for fiscal 2023. Here's the fiscal 2022 numbers on the pro forma new segment basis. We're going to build the guidance off this. Next slide. Revenue. Technology solutions around 40% OSP fee revenue growth, again, driven by those growing live modules. Ocado Retail, mid-single-digit growth.
Hannah's talked about that at the Q4 trading update. I'm sure we'll be talking a bit more about it a little later on. UK Logistics, broadly stable. EBITDA, positive EBITDA. That's pre those group and other costs of around GBP 20 million or so. Positive EBITDA. Group and other costs stable, there's that GBP 25 million. Ocado Retail, marginally positive EBITDA. Again, the phasing of that EBITDA, a really important point, will be very much second half weighted rather than first half weighted. Then UK Logistics EBITDA, stable at around GBP 25 million. Next slide. Cash flow to improve by around GBP 200 million. To improve from what? To improve from an GBP 800 million underlying cash outflow in fiscal 2022. 600 million pound underlying cash flow expected for fiscal 2023.
Driven by those increasing fees, inflows in technology solutions, growing modules number will grow those cash inflows. At the same time, we've got the outflows reducing. We've got a smaller number of sites going live next year versus this year. Think about that phasing as well and the impacts of that. Capital expenditure, a total of at most GBP 550 million, a reduction of at least GBP 250 million versus fiscal 2022. I've explained there the key drivers of those dynamics resulting in that smaller capital expenditure number. Lots to get through there. Thank you for your time. I'm going to hand over to Tim.
Thanks, Stephen.
One of the big questions post-COVID, which is fundamental to the Ocado equity story, is the scale and the velocity of the channel shift from bricks and mortar to online. To discuss what we're seeing here in the UK, let me invite the CEO of Ocado Retail, Hannah Gibson, to the stage.
Hi, Tim.
Hi, Hannah. Tell us, what are you seeing?
If we track back and think pre-COVID, the online share of the market was at about 6%. Obviously, during COVID, we saw that peak to over 15%. Obviously, as, you know, people started to go out and about more, as we returned to some level of normality, we've seen that drop down from the peak. Actually, we're now seeing that stabilize at about an 11% share of sales. Obviously, in the UK, we've got a, you know, Stephen alluded to this earlier, cost of living crisis. We're also seeing the normalization of COVID behavior. As Stephen mentioned earlier, that, you know, slight reduction of COVID, like, the peak of COVID baskets. Obviously, that means we're seeing kind of some headwinds in terms of the volume of our existing customer base.
Now, that said, we are seeing growth in new customers. We saw our customer base up 13% last year. We saw our online share of market grow by 60 basis points. We've got this kind of dual effect going on, where we've got that growth coming through from new customers, but some of that being masked by the headwinds from the existing customer base. You know, like many others, we're seeing that normalization at 11%. Absolutely, you know, we're expecting that growth to kind of go from there once we've seen those headwinds play out over the course of the year. Obviously, that's what we're seeing in the U.K. You've presumably got a broader picture from an international perspective as well.
Yeah. Internationally, our clients are seeing something fairly similar. Some markets didn't peak as much, therefore they've not come down. Some markets also saw huge surges and peaks, they've come back down and now seeing underlying customer growth. All our clients are seeing, you know, good growth, but from a lower base than the peak of COVID. I think it's a similar story around the world. Hannah, why are you confident that you can take an outsized share of this growing market?
I always think that we've always focused on raising the bar for what a great experience online grocery looks like, and, you know, the improvements we can make to make sure we've got a fantastic customer proposition. We've seen, and we've talked about for years, we've got some of the best, you know, customer NPS scores in the industry. Just a couple of weeks ago, we had the latest tables come out, which show once again we are top of the league tables when it comes to proposition. We see that play out in our numbers as well. Yeah, our loyalty numbers are the, are the highest in the market too. Now, what's interesting is I think the customer base we're now talking about to go after is somewhat different to pre-COVID. You know, pre-COVID, we had early adopters of online.
Actually, if you look at the broader base of who's shopping online now, we see three-quarters of households have now shopped online, and the majority of those have actually shopped online at some point in the last three months. We've always thought we've got a great opportunity to switch those from other retailers onto Ocado because the better proposition, and now there is a larger base of those individuals to go after. Actually, you know, what I think is more exciting is then saying, "Well, how do we get the proposition to be even better so that we're not just talking about switching people from other online, but also getting people to switch from offline to online?" We think about the proposition, you know, especially in the current climate, focused on, you know, value is incredibly important.
Today, we're actually announcing our Ocado Price Promise, where we are matching the price of your Like-for-Like shopping with Tesco. If we think about choice, freshness, you know, we need to get back and really focus on that, both what we can offer for M&S, those small, unique brands that can really kind of attract different customers to Ocado. When it comes to service, you know, we've had some of the best. I believe we've got the best, you know, fulfillment rates, on-time services in the industry, but that's just where we are today. If I think about the operating model we're on, the dynamic nature of the CFCs, I think there's a huge amount of improvement that we can do to that customer proposition going forward.
I like to think of it not just how can we generate a share of the market, but actually how can we drive online growth. With that, obviously, we'll generate share as well.
Obviously, all these innovations that are coming with Ocado Reimagined that will help that and those, the innovation, the technology, and all the advantages that you have at Ocado Retail are what we're bringing to our clients globally for them to also steal market share in their own markets. Stephen, bring you back into the conversation. With the channel shift starting to build again from a higher base, what kind of growth are we seeing in the technology solutions business?
Well, I think we've seen, and I've really just talked about quite a few of these just now, some really good performance measures that are coming out in the OSP and how it's working for our clients. We've got 12 sites going live.
We're gonna have 20-23 now total live sites. Increasingly now we've got more international sites than U.K. sites. That module growth, that 62% module growth is really important, that live module growth. You know, each live module drives revenues and a very attractive contribution margin attached to it. That's a really encouraging number for us. I think, you know, increasing number of go lives is gonna help there as well, but also our, you know, our ongoing client success as they ramp up into their CFCs will drive even more growth in live modules. Optimizing the OSP economics, really important.
I think we've been delighted at the progress we've made here, and as I've mentioned a little while ago, we think we can get much better than this even. It's, we have a very attractive operation, with very attractive economics and, now it's our job to get them out there and to help our partners deliver the best of those, of those CFCs. Tim, there's a lot of talk in the market about the time that some of our partners are taking making orders for more capacity. How would you describe what's going on, and what implications does it have for the business?
Yeah, Stephen, look, a number of our partners are focused on ramping up the capacity that they've already drawn down and working out in these first sites how to optimize the economics in a way that, you know, Ocado Retail and Ocado Logistics do very well in the sites here in the UK. Then they wanna get to that level of efficiency, and retail is always a cost domination business. You know, it's great to have an amazing machine, and all the sites that we've launched globally are hitting all their SLAs, all the machinery is working phenomenally well. They can all hit their sales capacities, et cetera. But some of the...
This is quite new to some of our clients. They're having to kind of get used to how to operate them and how to have the right amount of labor at the right amount of time, and how to use the UX to drive customers into the right parts of the day and days of the week, how to be efficient with their marketing and stuff like that. They're really focused on optimizing this new business for them, ramping up the capacity, improving the economics. Then, you know, I think they'll then look at deploying the next step of capital for accelerated future growth.
I think this is a fairly normal part of the investment cycle and, you know, to be expected when somebody does something as new as this as it is for some of our clients. For some, it's kind of newer and more different in their market than it is for others. You look at markets around the world, some are. You look where we're launching this year in Australia, for example. Australia market worked very similar to the U.K. Ocado's different in terms of the automated fulfillment, but the delivery side looks very similar, automated or from stores. You look at the U.S. as an example, and it's much more dramatic the difference 'cause the U.S.
Market built up on Instacart, kind of crowdsourced, you know, groceries being delivered in the back of someone's car to another person's house. I think that they're all learning. What we've done is we've leaned into this this year with our enhanced partner success operating model, where we've created global teams of excellence in marketing, in UX and web, in warehouse operations, in routing operations, in network planning, et cetera. We're deploying regional teams to leverage that global centers of excellence on behalf of each of our clients. What you can already see in it is how clients, you know, wanna draw on that in different ways. Some wanna draw on the customer acquisition side, others are drawing more on the operational labor planning and stuff like that.
We're deploying people all over the world with our partners to help them optimize and get the best economics out of these amazing sites that they've got. We are expecting a increase in new site orders in 2023, also benefiting from the fact that the new sites have got optimized site design and Ocado Reimagined in them. Of course, from a cash flow perspective, the moderation of new modules going live in financial year 2023 is one of the reasons, as well as the improvements in operating costs and increases in revenue, that you're talking about lower net outflows. Obviously, partly that's lower CapEx in the year.
Yeah. Thanks, Tim. Now, just taking us back to Reimagined for a moment. How's Reimagined playing out into conversations with, potential new partners? Ones we're not having today, but how about Lotte when we were agreeing that deal with them? How did Reimagined play out? What did they raise it much? Was it a focus for them?
You know, everybody's been very interested in Reimagined and what it delivers for us. To answer the question, actually, I'll tell you what, I'll invite James to come and join us on the sofa. James Matthews, CEO of Ocado Technology, and, let's ask him some questions. James, bring us up to date. Welcome.
Thank you.
Bring us up to date on the benefits of Ocado Reimagined. Then I'll talk after that, Stephen, to the, you know, what impact it's had on new partner signings.
Great.
Thank you, Tim. So 2022 was definitely a busy year in our program of bringing Ocado Reimagined to life. Every program here is well advanced, and I think it's worth me highlighting, this was in the annual report, some of these products are starting to go live. On-Grid Robotic Pick, Automated Frame Load, each of those is now live in a real CFC, picking and frame loading real client, real customer orders. We're starting to get the early data from them that will help inform us on the rollout. There's a lot of detail on the slide behind this. I think the broad point here is that this whole portfolio is available to order, and indeed is being ordered.
A CFC that goes live that was ordered in 2022 will go live with an expected productivity of 300 units per person hour in that building, well ahead of the already impressive 220 that we're achieving in our pre-Reimagined CFCs. What's more, that more productive CFC will be 20% smaller than it would have been for Reimagined, thanks to Reimagined and our optimized site design. That in turn has knock-on effects on reduced CapEx for our partners, reduced lease costs for our partners. The last point I'll make is that on top of the economics, it's also about flexibility. These innovations provide options for smaller sites, for older sites, for different configurations. They enable our partners to configure their business to offer more flexible services to their customers.
It's not just the pound notes, it's also about the flexibility for the partners.
Thanks James. Look, I think it's just worth highlighting to everybody, obviously the savings in terms of smaller buildings are directly for our clients. Obviously the enhancement that James is talking about, the 220 to over 300 units of productivity an hour, allows our clients to remove a third of the people that they need to operate a warehouse at any given volume. We are passing on the majority of the economic benefit to our partners, the majority of the Ocado Reimagined benefits, enhancing their ability to take share in the online channel in their respective markets, whilst also enjoying a slightly higher fee, as Stephen mentioned earlier, that will translate to better operating margins.
This increasing attractiveness of OSP has also played an important role in new partner signings this year, bringing on Lotte in Korea, and also bringing on Ocean and Auchan Polska in Poland. We have the largest team that we've ever had in terms of talking to new clients, and they are extremely busy with a strong pipeline of conversations ongoing. With Ocado Reimagined, we can see a clear link between the technology R&D and our return on capital. James, when we think about the business momentum, what we're seeing tech R&D drive faster growth and higher returns. Can you talk a bit more about that?
The, the analysis that we have on the screen behind us, I'm just gonna run us through that. This is a broad brush look at where the GBP 300 million or so we are spending on R&D right now, where it is going. On the right-hand side, we've got three categories of must-dos. We've got our legacy platform, Ocean, that is still supporting Ocado Retail and Morrisons, although both of those retailers now have customers live on OSP, so those migrations are underway. We're spending about GBP 30 million on that. We have a range of enhancements that we have to make as we launch new partners around the world in new territories for tax reasons, for regulatory reasons, alcohol regulations, to get people live.
Lastly, and importantly, an element of spend on the platform health, security, patching, maintenance, making sure that we continue to hit all of our SLAs. That's about 30% of our spend. The more exciting 70% is all going into enhancing the platform in a number of important ways. Very importantly, making the platform better for our partners' customers. Better eCom interfaces, better supply chain performance, more personalization, better last mile delivery options. There's up to GBP 60 million going into that. A large amount of investment in Reimagined primarily, that is, as you pointed out, primarily aimed at improving our partner economics. Last but not least, a certain amount of investment that directly affects our economics. It affects our economics in 3 ways.
It's reducing the capital that we need to deploy a CFC. It is pushing our fees up from 5% of client capacity up towards 5.5%. Also, it's gonna, as Stephen says, we have an increasing amount of confidence about our 1.5% applying capacity direct operating cost. I want to get us there as quick as we can. My personal view is that we should punch through that on the head, you know, from the 1.5 more towards the 1%. Not an official forecast, but that's my ambition in that space. If you take those three areas where we're improving our economics, that results in the north of 70% contribution margin, and north of 40% ROCE on our investment into those CFCs.
The GBP 300 million expected spend in FY 2023, where do you see it trending to, and why?
Well, as Stephen pointed out earlier, for our online grocery platform, I see that trending to the 200 million GBP mark in the medium term. There's a number of obvious savings and efficiencies. I mentioned Ocean earlier. As we complete that transition, that's an area we won't need to spend in. As our platform becomes more mature, has more configuration options, there's more that it can do out of the box. There's a number of areas where we can reduce spend. It's worth pointing out that this spend will be spread across an increasing amount of partners, so the sort of per partner spend is gonna come down even more significantly.
There's two last, I think, important points I want to make is, one, of all of the technology, the intellectual property we've built over the years, my estimate is about 70% of it is broadly reusable outside of the grocery E-commerce context. What's more, because in a logistics context, grocery is normally the harder problem to solve, it should account for the majority of the needs in another context as we look to deploy that elsewhere.
When you say the majority James what you mean?
I don't mean?
Tens of Percents? 20% or-
I mean, like.
A few %.
90%, you know.
90-plus % of
As you go into new markets, some enhancement will be needed, but really the vast majority should be taken care of by the intellectual property that we've already built.
Brilliant. Thanks, James. You make the important point about how 70% of our investment already can be applied outside of the activities of the grocery sector. My last guest, Mark Richardson, the CEO of our new capital light non-grocery business. Mark, please join us. Thanks.
Hi, Tim.
Why don't you tell us about the market opportunity for this new business?
Right. Well, you know as well as I actually that the MHE and the systems that we've built over the last two decades are highly evolved now. They're brought up in the world of grocery E-commerce, with all the complexity of multiple temperature zones, massive each's throughput, and the relentless focus on productivity that that entails. It's a tough test for logistics solutions. As a result, our solution is properly battle-hardened and with capabilities that are appropriate far outside of grocery retail. If you're an organization that needs to store, sort, and ship products, then Ocado MHE is a new, space-efficient, high productivity and very high throughput option. The market of people who wanna do that is very big, and we are confident we can address a large part of it.
Mark, from a practical perspective, what do you think the business will look like?
We're expecting to run our capital light model, where our customers purchase the solution rather than license it, and where Ocado realizes its margin in the year of go live. In addition, we're looking to leverage largely R&D already done in the grocery business or already planned to be done in the grocery business. That means that we don't expect the new venture to require capital over and above that we've already guided at group level.
Mark, finally, I guess the question that's on everybody in the room's lips is how are your conversations with potential clients going?
Right. Well, it's, excuse me. It's becoming increasingly apparent that Ocado has something quite unique to offer to potential customers. We not only design, build, and code our solutions, but we also deploy them in our own operation here at large scale in the U.K. W E operate them. That gives us an unusually detailed and practical view of how to get the best out of them and how to help a client or a customer get a real world benefit from the MHE that they've bought. Partly as a result of that, we're already in detailed conversations with a number of large organizations around the world, and we're working towards installations of various sizes in a number of different industries.
It's worth saying that all of that activity is currently being generated just from inbound contacts, because we haven't started to market our solution yet. That will begin later this year. It will pick up speed next year when we start to take the equipment to the world's biggest trade shows. I suppose the last thing I should say on the subject is we do expect to sign our first deals this year, and we expect meaningful revenues to start to flow in 2025.
Mark, thank you very much. We also look forward to hearing more about those signings as and when they occur. Thanks everybody for being a part of the FY 2022 results presentation. I'm just gonna run through a quick conclusion before we get to the Q&A. Channel shift from bricks and mortar to E-commerce in grocery is now resuming from a higher base than pre-COVID, but, you know, obviously from a lower amount that was achieved in the peak of the COVID pandemic in a new post-COVID world. Ocado is helping a growing number of partners globally to lead this process in their markets.
We now have more CFCs internationally than in the UK for the first time ever. Our ability to innovate at pace is creating an ever more attractive solution, improving the economics both for us and our partners, and showing the strong link between the tech R&D and higher returns for all the relevant stakeholders. We have important opportunities to take our technology beyond grocery. As we deepen our relationships with our existing partners, we've learnt a lot about how to help them make the most of our world-leading technology, and we're confident that we'll see the benefits of these learnings in the next few years as we progress our mission to change the way the world shops for good. Now we're gonna go to Q&A.
I think, Stephen, you and I are gonna take the Q&A, and James and Mark can go back to being a member of the audience. Unless we need to draw on their expertise. Right. Nick? Yeah.
Hi. Good morning, Nick Coulter from Citi. actually a question for Mark, who's just sitting right in front of me, fortuitously. How do you benchmark the ex-grocery proposition? How do your customers benchmark it? Is it capital cost per throughput, or is a third access on throughput cost? you know, how should we think about it, and who are your principal competitors in that market, please?
Nick, generally, can we just steer the questions here, I can happily kind of pass some back.
Sorry, sorry, Mr. Chairman.
That's not a problem at all.
Apologies on that, on that front.
No problem at all. You know, Mark, why don't you just actually go ahead and give your answers.
Right.
I think, you know... Well, go ahead. Why don't you give it a shot?
Yeah. What we encounter so far is, you know, customers are looking for, they're actually looking for a bunch of different things, right? They're clearly very interested in price and productivity. They are, for instance, some customers are very preoccupied with throughput, which is an area, you know, because we grew up in grocery, our solution is capable of extraordinary throughputs, the like of which you don't really encounter in a lot of other industries. They're also, very attracted to simplicity. There's another example, 'cause people know that, you know, you buy a fast machine, and maybe it does go as fast as it says, but you still don't get from your operation quite what you were hoping.
One of the important factors in that is delivering something that's relatively simple and doesn't involve stitching together lots and lots of different MHE. Yeah, the customers we've encountered so far are attracted to all of those different things. Our principal competitors are the people you would expect. They include AutoStore, they include a number of well-established MHE providers.
Differential. What's the point that is going to make you take share versus the established competitors?
Well, I would say, throughput certainly, right? Ocado can deliver a very, very fast operating warehouse environment. Our productivity is outstanding and going to get considerably better with reimagined. We have a roadmap to a very, very high productivity solution, which betters anything I've seen so far, with which we compete. I'd say, there are certainly some potential customers who are very attracted to working closely with an organization that lives its own solution, because they've bought things in the past that they couldn't quite get the results out of that they were hoping for. They love the idea of working with people like us who definitely do know how to get the best out of the kit.
Nick, I think it's important to understand that we didn't enter this business, say, three years ago, because when you looked at the solution we've been rolling out up to today, it is engineered to have significantly more throughput, not tens of percents, but hundreds of percents more throughput in a square meter of space than anything else in the market. To achieve that, our robots sat on a single square, right? A single grid space, which is both engineeringly difficult, but also protected by patent. They had bigger motors to make, to be able to accelerate faster and decelerate faster. Those bigger motors needed more current, so they had bigger batteries, and they therefore weighed more. They weighed more, they accelerated significantly faster, and they operated at much greater density.
Whilst they were more expensive but did more throughput, the grids that supported them needed to offset a significant multiple of the forces and had more metal in them, more engineering, more bracing and took longer and cost more money to install. They were only valuable in very high throughput sectors, and the biggest one of which is the obvious grocery, which is why we focus there. The bot that you can see in that picture, the topology-optimized, additive manufactured bot that has the same physics characteristics in terms of its acceleration, decelerations and speeds, et cetera, but weighs 70% plus less, means that we can achieve that incredible level of throughput with a cheaper bot that actually, you know, doesn't drive the forces to the same level.
With our new re-Engineered grids, we're now at the point where we can build something that is cheaper than anyone else can and has the capability of significantly higher throughput. It's become an extremely attractive product to a much broader set of uses. I think that an Ocado grid, compared to any other grid, can handle a multiple of the amount of volume per square meter for a variety of different reasons. It's not even, it's a multiple of more than one times the same throughput from a single square meter. A number of the people that are approaching us have installed competitor products but can't get the throughputs that they want, and that's one of the attractive things about ours.
Actually, we're not positively marketing, as Mark said, at the moment. We can still, on a price perspective, go and compete with the low throughput use cases as well, because the depth of innovation in R&D has meant that this machine capable of higher throughputs actually can be cheaper than one that's only capable of lower throughputs. Then it gives you much better flexibility as a result if you then, you know, suddenly find you're on a sales tear or something like that.
Thank you. I'll leave it there. I'm sure we'll hear a lot more. Thank you.
Thanks, Tim. Andrew Gwynn from BNP Paribas Exane. Let's go for two questions. Firstly, a boring question, but on gross margin for the retail business. They're down 230 basis points, really quite a big move. You mentioned vouchering, but that seems like a very big move just on vouchering. Taking a massive step back, Tim, the channel shift, obviously massive step up during the pandemic, but why would you start getting groceries delivered today if you didn't start during the pandemic?
First of all, on margin, there's a combination of margin pressure, which we always see during periods of inflation in grocery retail, largely because no retailer wants to be the first one to put the prices up. You always see a lag between the price rises coming through from the suppliers and the prices going up to customers. We've seen this, trying to remember how many times. I've been doing this for about 19- 20 years or something. We've seen it about three or four times. The margins tend to end up where they started, but with a lagging, with a lagging effect. I think we mentioned before that whilst I'm reading in the newspaper about something like 17% inflation, our average item price, I think at year, year-on-year is up about 7.8%.
We're seeing about 1.1 in a basket mix within our own shop. The average price at Ocado is up 8.9% versus the 17% inflation. After a mix effect, the average price of the items that we sell is up to 7.8%. I think there's a combination of that, and as you say, there's the marketing. I think one of the ways to think about this is that we didn't get to market and attract new customers in 2020 and 2021. In fact, almost the opposite. We actually had to kind of, unfortunately, really heavily focus on our best customers and on customers that the government and, you know, morally we needed to focus on as well.
That kind of pushed some of our other less loyal customers out. Now that we've got to go and do that marketing. You can see why marketing is an accelerated rate, because you're making up for the lack of it in 20 and 21 and to try and kind of cover off that volume. I think that's really where the combination of those two is where the margin impact is. The other question was, why do I think that people if they haven't tried it during the pandemic, why would they try it now? They may well have tried it during the pandemic. They may well have tried it now. The real question is whether it becomes something more of a, A, will they try it at Ocado?
The reason they didn't try it at Ocado during the pandemic is we shut our shop to new customers. They clearly weren't allowed to try it with us. We spent the first three or four weeks, I think it was, of the pandemic building a system to actually make sure that we could keep new customers out the shop to, in order to allow our regular loyal, long-serving customers to gain access to the service and not be muscled out by the million plus people that were trying to get online to our site at one point in time. Some of those people are trialing us, having trialed other services or using other services. We've always, the greatest over-indexation of where people shop before they come to us has always been Tesco and Sainsbury's and Waitrose online customers.
To the extent that those services have grown, that's actually created a good pool of potential customers for Ocado Retail. What I think is also important to, to think about is as online retail improves, as execution improves, as freshness improves, as the software improves, as the UX improves, as the lead time between when you need to order and when the groceries come improves, then this becomes a better proposition for more people. Or it can, you know, at the moment, for example, if you're not good at habitual behavior, you know, if you only think about your groceries the minute you need them, then you can shop online in an immediacy service with a very small range and higher prices, but you don't do your full shop.
You go to the store even though you wanted to shop online, but while you're there, you buy too much stuff. As we launch on from Ocado Reimagined some of the new software that will enable all our new sites to offer short lead time and same day deliveries, you change the dynamic, and you make yourself more attractive to more people, whether it's consciously or kind of, or subconsciously in their behavioral in their behavior, and you grow the potential market.
Those are comments you think apply internationally, certainly?
Yes.
Yeah. just going back to the gross margin point and I'll hand over. just on the gross margin, is it now pretty much behind us? Do you think your sort of pricing is more or less where it needs to be to hold gross margin? is there still further pressure?
I think if we ask Hannah's team, there is still pricing pressure coming through. The inflation has not fully hit the system yet. There are still suppliers pushing price rises through, and there are still retailers trying to hold that off. I expect prices will rise during the course of the year. Whether next year prices fall when the knock-on impacts of energy coming down, natural gas coming down, you know, whether it all works through and eases, I don't know. At this precise minute, what the supply base thinks it needs to charge has not been pushed to retailers and has not been pushed onto customers fully yet.
Thank you. Very clear.
Sorry, go ahead.
Hi, it's Mark Stewart from JPMorgan. I had 3 questions as well. First of all, I like the format of this. It's much better having everyone in front of us. So thanks for this. I have 3 questions. The first one is also on retail and customers. Could you tell us maybe a little bit more about developments, gross and net additions? i.e., have you lost loyal customers because of price and macro, and then you had to basically compensate with new people coming in. How sticky are they? I mean, in the past, you obviously commented they're very sticky. Has macro changed anything? Second question for, maybe for Stephen, the sources of CapEx improvement. You elaborated on this.
Should we just say the move towards GBP 550 CapEx, is that really just broadly phasing of the new projects ramping up and when you actually pay for that CapEx? Or is there other components as well, i.e., savings, scale on you purchasing on certain items, or delays? Yeah, is that maybe something to comment on? Then the third question, a bit more strategic and on for Tim. Can we talk a little bit more about the debate micro fulfillment versus centralized fulfillment centers? It seems that Lotte obviously you had a component that Lotte branches also need micro fulfillment.
How credible do you think is the argument that some big grocers want to protect their branches for that, hence micro fulfillment is, at least in the short term, much more important for them, which basically delays a little bit the big move towards centralized fulfillment. Yeah. Is that something that comes up in discussions, if you can just talk a little bit more about this as well?
Sure. On the retail and customer front, you know, I think we've always used to show those charts we called the Paul Smith charts because they were like multicolored stripes. I think it's fair to say that we're still seeing very, very consistent revenue from all of those cohorts. What you can see is that customer basket size and frequency have gone back to kind of pre-COVID levels from accelerated both basket size and a small increase in frequency as well. Yes, when you look at kind of switching data, you can see some people switching in, you know, to other grocers. There's nothing of any materiality in that. Our customer loyalty is very good. Once a customer gets to 3 to 5 shops, their loyalty is super strong.
The challenge that we have is we kind of grew the volume you would have grown if we had been acquiring customers. Without acquiring customers, then the ones that you still have are now shopping at the lower level. Hannah's running to acquire new customers all the time. We're not yet, or we're soon, during the course of this year, we start to lap similar periods. In Q1, we were still lapping some higher baskets from last year. We've got more orders, more baskets. You're still kind of compensating. We come out of that phase soon. The new customer acquisitions will just drive actual growth.
I think the other thing to understand in a cost of living crisis is if you think about our customer base, our customer base is not eating all of its meals at home. Our customer base is spending a significantly higher multiple on some meals by eating them out. If they want to, you know, save money, the best thing to do is to eat one less meal out and eat one more meal that you bought the ingredients from us, 'cause that's actually the way you save a lot more money than trying to work out if you can save one or two pound by buying something that we sell at Aldi or Lidl or Asda or somewhere, right? Much better to, you know, stop buying a Deliveroo or going out to a restaurant.
There's a whole kind of battle there. I think the other thing to understand is that Hannah and the team and our partners at M&S are working kind of furiously now together to improve the offer and the proposition. It's worth thinking that, you know, we did the shift from Waitrose own label to M&S in the middle of 2020 in the middle of the pandemic.
We had spent 19 years working with Waitrose's supply base in terms of working to optimize the way that it worked for us and for our customers, in terms of the way that it gets delivered in, the frequency it gets delivered in, the life it comes in with, the way it's packaged and stuff like that to drive the optimal performance for somebody buying a large weekly shop and not somebody who's turning up at a convenience type format to buy tonight's dinner. Obviously in 2020, 2021, suppliers were just like, "This is what I can give you. Do you want it?" The answer was, "Yes, this, we'll take it." We're starting to work very closely with everybody to re-optimize the new supply chain to improve what we're doing together.
I think there's lots of opportunity for Hannah and the team, working with Ocado Logistics and M&S to overall improve. Before Stephen gets into any detail, let me just there's two things on the CapEx, right? One obviously is, yes, less CFCs rolling out this year is less CapEx if they were the same price. I think one thing that's important people to understand, 'cause it's the opposite of the guidance that everybody else is giving in the automation and robotics sector, is our CapEx per pound of capacity is coming down. Everybody else is reporting how, you know, their margins are being depleted by the inflation in raw commodities, the inflation in labor, the inflation in shipping. We are seeing inflation in commodities, inflation in labor, inflation in shipping and challenging supply chains.
The amazing work that we're doing in R&D and innovation means that overall our CapEx is coming quite materially down per, you know.
Per scale.
Per scale, per amount. Well, it's some element of scale. A lot of it is around the innovation, right? The innovation is, you know, a better algorithm means that you need 5% less or 10% less robots to do the same amount of work. Therefore, if we sell this thing in capacity, our costs are coming down by that amount on the robot front as an example, right? We are opposite to the entire rest of the industry there, where we look forward into 2023 and 2024 and say, "To build capacity will cost us less," not, "Oh , how do we pass this price rise on to our end partner clients?" I don't know if that fully explains. It's the combination of the two is what's driving lower CapEx.
Your third question I've managed to forget in answering your first two.
It's the most interesting. No, it's micro fulfillment versus centralized fulfillment. What are basic grocers saying in terms of timeline?
We were talking a lot about MICROS, if you recall, about four years ago or something like that, we were talking a lot about Takeoff. It was the business that was going to kind of destroy what we do, and obviously, that didn't happen. Last two years or last year in particular, we were talking a lot about even smaller MICROS, kind of, almost nano manual fulfillment centers of the likes of, you know, Getir and Gorillas and the other 15 people that try to do this in London as an example. I think there's a lot less noise now from that market.
MICROS is still an important product for us, and we've got more innovation going in MICROS and we've launched a number of sites this year here in the U.K., and we're now working on driving the operations in those sites to achieve the productivities that they were designed for. We've got software coming out this year to help their supply chain and inbound, their product life to get the waste down. We've got changes going on to improve the delivery densities and stuff. I think when and if we achieve what we expect to achieve, we'll see a faster rollout. I think our clients are always very interested to see those sites. I think they'll be more interested in terms of deploying some themselves when we've got them operationally working the way that they're designed to do.
There is still great interest from a number of our clients around a lot of opportunities with MICROS. As a reminder, our MICROS have basket sizes that are more than double on our closest competitor, 40 something GBP on average as a result of selling over 10,000 SKU range in them, which is unique ability because of the robotic infrastructure in them and the support that they have being fed from our larger, robotic single-pick warehouses. That selection drives the basket size, which obviously transforms the economics, and our clients obviously can take advantage of the same thing. You can't or you shouldn't start with 10 MICROS because they're quicker to build and then build a CFC to come 2 years later.
You need to build the CFC because that is the supply chain to the MICROS, and then consider, you know, kind of adding the MICROS on top. Lots of innovation at the moment on front end, on supply chain and some on, on the mechanical engineering side to drive productivity and usability in those areas. I think it could become a large part of the market. There may be some markets in the world where the majority of groceries go through those. It's probably not the more developed markets that we're in today.
In those more developed markets, this is the convenience or immediacy part of the market, the big sites are like the hypermarket part of the market, which whilst hypermarkets haven't grown as much as convenience in the last few years, they're still by far the majority of the market in the U.K.
To what extent, I mean, and, do microfill stops the big supermarket CEOs to take on the big bet and to go centralize fulfillment centers because they will just want to protect their branches? Probably not the right thing to do.
I think-
In the short term, they seem to willingness to protect them. I stop.
We're not really seeing people saying, "You know what, give me MICROS in the back of my store." Because a number of people, well, no, invested sub kind of $10 million in book put or sell or whatever it was, and put one or two of those MICROS in their stores and realized that what they were being sold was the emperor's new clothes, and that the operating efficiencies they were being promised, the reality was very, very, very different. Which we could have told them going into that they were just being told something that wasn't going to happen.
Actually, what we can deliver to a client is the most efficient MICROS in the world that actually do have attractive, very attractive economics for fulfilling short lead time one hour sub orders. We will get to two hour plus orders from the large automated facilities for people using some of the new reimagined software. There are clients who are interested in looking at cutting corners off some stores where they built excessive amounts of space and building one of the MICROS inside it. We can put our micro in their store.
We spoke before about how one of the benefits of Reimagined, the lighter weight robots generating less forces meant that the grids could be more tolerant to being installed on a more generic floor that might have been built as part of a store rather than built as a dedicated, you know, site waiting for this automation to arrive.
The amount of concrete in the slab that's needed is reduced, the smoothness of it is reduced, and so we definitely have clients who are talking to us about the potential to put these things in and alongside stores, and then people playing with those other variants that others have mentioned before, where you kind of think, If I've got a store that's got small range in it or something like that, I could put one of these on the side, and maybe I'll have, you know, people will come to the store to buy the fresh and things like that, and at the same time, they can have a much larger range delivered alongside. Then there's two uses for it.
One is the courier delivery to home, and the other is like a range extender for the long life dry ambient next to the store, this kind of thing. There's a lot of discussion there. There's a lot of interest. I think the main thing is people will still roll out the big ones, and I think they will then add Zoom on top.
Just a quick point on that CapEx point. Tim had two of my three points. I think a really important point is, as I referenced it in the earlier presentation, sales and operations planning, joining up the balance sheet with the demand profile and therefore what you need to order. You know, getting that, you know, a smooth operating machine, there's efficiency there around CapEx procurement. It's not just phasing that GBP 550. That's the sort of number that I think, you know, we should be thinking about for the next one or two years. given what the visibility that we have today
Look, Steve, we can be frank. When we built the first sites internationally, if we thought we needed to put five in of something, right? We didn't want to fall over the hurdle of putting five in, discovering we only got the throughput of four 'cause it was, you know, wasn't there, and then we'd get kind of bad client reactions. We usually put in 6, right? We now having installed 6 and using them somewhere, know that actually six really equals seven. If you see what I mean, right. We now know how well the kit is performing across these international sites, and we can now put in what we know that we actually are being paid for and not put in extra just in case, 'cause we don't wanna let the client down.
We now know what it takes to add 10 pick stations and a few other peripherals and some extra robots as an addition, in terms of the kind of teams that we need to deploy on site to do it, and therefore, whether. You know, to start with, we also said, 'Oh, well, actually, we might be back to this site in 6 or 12 months.' The cost of kind of re-gearing ourselves up back on site is quite a lot. Actually, let's predict when we might have to put it in and put it in early, and stuff like that. We're now much better at doing this.
We went from building two sites over 15 years and then two sites over five years to getting up to the, you know, 20 something sites that we've got live, and last year, having more sites go live than, you know, than we'd built in however many, you know, in 20 something years or whatever it was. We're better at it now, and as Stephen says, we've got much better control with the new systems as well as the way that we're working, the new processes and some of the internal restructuring that we've done, and so we can control it and make sure that we put down the theoretical amount that we need in the models, and we don't kinda go, "Oh, well, let's worry about when it turns on. Let's put some extra in.
Let's worry about this, whether we'll get the throughput that we need per pick station, so we'll put some more in there. Some of that is what's driving our ability to look at existing sites where we've built something we call a six module site and tell a client, "If you're getting up towards six, don't worry, you can have seven in it." That's free opportunity for us. It's great opportunity for the clients because it means they can do more throughput with that, new building with that new site. We're seeing a lot of those opportunities in the network.
Thank you.
Just behind you is another question. Sorry, we'll try and work our way.
Right. It's Luke Holbrook from Morgan Stanley. Just a question. It looks like a big chunk of the year-on-year decline in your CapEx guidance is coming from Kroger. It looks like you're looking towards five CFCs this year, maybe only one Kroger. What's the latest in terms of conversations that you've had with them?
We're doing a lot of work with Kroger. They've got a lot of sites that have gone live. They've got more sites coming live, and we're working together. Our belief in the long term is they'll have many more sites than they have now. We're working at the moment on helping them in the operations and the network planning and the route planning and the marketing. You know, we're working across their whole business extremely closely with them. Our global head of partner success, who is a 20-year Ocado veteran, is relocating, so we're gonna run our global partner success business from the United States. He's gonna be based there. He's also the President of the Americas for us. I fully expect them to.
They have got the busiest international sites, so some of their sites are at the top of the league table in terms of volume going through them. We need to help them. You know, this is a new kind of operation. As I mentioned earlier, it's more new for anybody operating in the U.S., this is more new than it is operating in some of the other markets because the way the U.S. uniquely came to the online game later than other markets and built up this kind of crowdsourced type model.
you know, kind of getting your head around the operations and optimizing yourself when you're used to doing a kind of call someone who's on their way back from school, from a school drop-off to pick up the groceries and drive them to a customer's house is quite different to the new skills required to somebody who was doing a employee on an Eight hour shift, picking in a store, putting it in a van that's also owned by the retailer that goes and does an Eight hour route. It's more new in the U.S., and they've got more learning to do. All the underlying metrics of the things that we can't show internationally are extremely positive. Our expectations of the long-term opportunity is larger than ever.
It's definitely the hardest one to get the fine-tuning right immediately because it's coming from a completely different kind of model. Our expectation is that we will see great growth from Kroger. Obviously, we know what's going live this year 'cause we know what we're building, and the question is when are the next set of announcements made, which are based on the progress that we're making in existing sites. We've got a lot going into it and we're extremely optimistic about it.
Okay. Just in terms of the time frame that they need to give you before saying that they need to de-delay deployment, how much warning do you get from them, and will this delay actually impact your revenue trajectory into next year now?
No, we know what we're expecting, and that's what we've guided you to. Look, the way it works is you've got sites where you've got specific sites where they've actually said, "We've signed this piece of land. We finished it. We're on site building." Then we can look at their building program, and we know when that means we get to site. We know how long we need to go to be live, to install, and then we know what go-live date they have, and we start earn fees. You know, there's two kind of trigger points where we earn some fees and then more fees. That's kind of quite transparent.
There are some locations where they've said, "We've signed a site in, you know, or for this greater area," and sometimes they're, like, still negotiating with 2 city, whatever you call them, cities or, you know, your local councils over tax benefits and breaks and this type of stuff. They haven't yet actually got on-site and started building, if that makes sense, 'cause they haven't chosen the site or signed it up. Then there are new geographies that they're talking to us about in network planning where they haven't yet signed the contract. There's kind of, there's live in build, there's sign and secure location we know the timing of, and then there's signed where they're still working out which location to take, and then there's ones that we expect to sign in the future. There's a combination there.
Our understanding of that planning is what's going into our forecast that we're making for 2023, and then the further out you look, obviously the more the error bars of how it could change grow. If they asked us, you know, if they decided now that they wanted 10 new sites, they need to find those sites. Now, in some places, that's taken them a similar amount of time to our, you know, average international client. One of the sites that we turned live in late 2022 was actually it went live, I think it was the 8th. The 8th it went live. 7th it went live.
It was actually the one of the two that was signed first, but it went live eighth 'cause just the property there was, turned out to be, take longer than elsewhere, if you see what I mean. What's happening on our side is we used to need 10 months from handover to allow us to start installing our grids to allowing them to start their, like, inbound go live. We've got that down to seven. We've got that, I think we're now at five for the same size site. We've halved the amount of time that we need on site.
For something like inbound go live, you know, we would now say to a client who already has experience of putting this product away in another machine and therefore the data's all good, that they could take out 75% of the time they used to allow themselves to do that kind of thing. We're shrinking these programs. When Kroger come in, it will be around property availability, and obviously we talk to them all the time about being ready to move when they want to go and finding properties in advance. Sorry.
Thank you. William Woods from Bernstein. I just wanted to kind of pick up on that slowdown of the CFCs into next year with the five coming live. Are there delays in what Kroger is doing, and are they your delays or are they their delays? I'm thinking about things like North Carolina, Maryland seems to have been going on for quite a while, and even something like Denver. Secondly, how many sites will you have in year 1 build in FY 2023?
Well, the first part of your question is, I think on the Kroger sites in total, I'm not sure we've had a four week delay on our side on any site that I can think of. It's the delays are usually them finding the land. You know, the U.S. is a particular market where the whole system around employment and taxes and stuff is quite complex. Sometimes those locations take longer. Maryland was the one I was talking about. It's called in our business FC02. It was number one was Monroe in Ohio. Number two was that one. Number three was Florida. Florida, one and went live in.
March two years ago.
Early 21. Number two went live end of 22, and that was purely down to property. No, we, our building programs have taken the amount of time that we expected. Generally, we have a bit of a margin in, a cushion in what we've, you know, told our clients and so where we've had some issues and, you know, we were building grids without being able to visit during COVID, and then we got there, and we went, "Actually you need a bit of remedial work," or something like that. We've been able to do that in the time that was allotted to us anyway and still bring those sites live on their actual program dates, which we only know exactly when they can tell us, when they can hand over the completed building.
They have suffered as well as from finding land in terms of timings, but also in terms of things like, you know, you used to have to buy a steel beam on, you know, seven days. Some of those things went out to six months or whatever it was. Sometimes even when you find the land and you finalize the planning, now you've got to say, "I need all these materials," and in the global supply chains we've had in the last year and a half, sometimes that's also added to the overall program legs. It's not, it's not issues in the amount of time it takes Ocado to install grids, commission, you know, install our peripherals, commission it, and turn them live. Your other question was about-
How many are in year one in 2023?
Not sure offhand.
More than five?
No, I don't have. No. We're waiting for a number of sites for us to be given dates to then go in to know when we're going to install into them.
Got you. Just to follow up on that. Is Kroger in line with its current commitments that it made in the initial agreement then?
The initial agreement was 20 of a certain size, but a number of the ones they built already were larger than that certain size. I think they've made, I think we've signed 17 commitments to date that are on average of a larger size than the 20, but we haven't yet been told the handover dates for those. We're sitting on specific signed sites of either a specific site or a, or a locale. When those are all completed, that 17 times the module would probably have been the number that was or thereabouts, right? Plus or minus. But that was only a notional number anyway.
The plan that we are working together with Kroger is substantially larger than that. Kroger very sensibly do not want to end up with, or did not wanna find themselves with 30 sites. They haven't yet worked out how to do, you know, the labor planning or how to migrate some of the processes that they have historically done in-store into warehouses. They can't mirror exactly what we do. There are things that they do with loose produce, there are things that they do with misters, there are things that they do with selling singles, there are things that they do with hot food. You know, there are things that their proposition does that they need to work out what do they do in this online format, and how do they do that in an efficient way.
When you look at those warehouses, you can see the pick, the decant, the pick, the dispatch is working as well as it is in, you know, on average in a number of our sites globally. It's the other processes and stuff like that they need to work on improving, I think very sensibly, and then say, "Fine, I've sorted this, I've cracked this. Now I can see my clear path. I wanna just go faster and faster." Those are the conversations that I have with Rodney. He wants to sort a few things out and then really accelerate.
The opportunity obviously is vast and, you know, we're hopeful as well that he will be successful in his acquisition, and obviously that is a extremely large opportunity of that merged business in terms of the footprint it should be looking to roll out.
Great. Thank you.
Sorry.
Charles Allen from Bloomberg Intelligence, you talked about selling, effectively modules into the non-food market. How will the revenue from that compare with the revenue in the supermarket area, and will supermarket customers be tempted to purchase modules?
Yeah. We're not, we're not selling equipment to our other clients. We've kind of got two models going on. We've got the single pick grocery model, that obviously is not just about the storage and retrieval machines, but also about a full end-to-end SaaS software service, and that is currently priced in this like kind of contribution and, you know, platform as a service, robots as a service, however you wanna describe it, kind of model, leasing type model, where we obviously have a large capital outflow and then receive a fee ongoing. We give the clients a lot of flexibility in terms of, you know, we guarantee the throughput, we don't sell them or provide them an amount of robots.
It's not only financial leasing, it's also a lot of risk that we accept in terms of the longevity, in terms of the throughputs, in terms of you know, continue giving them enhancements and stuff like that. That is the model that we intend to carry on working with in the E-commerce grocery sector. In the new business, we are looking at ourselves more as a traditional automation provider, in the sense that our aim at the moment is predominantly to sell that equipment to the client and to receive the full income or full revenue in the year of go live, and therefore run a capital-like model.
I think if a client tried to, you know, send in their general merchandise business and try and work out the costs of their facilities and stuff. I think they'll realize that, you know, effectively we lease that equipment to them. We provide the software, the servicing, the maintenance and a margin, and I think it will be swings and roundabouts as to which one is more economically attractive. There's a huge attraction in grocery because we have taken a vertical of the market, and the amount of resource and the amount of knowledge that we can bring to that is very different to somebody who just wants a generic automated storage retrieval system.
We have signed on clients in the last, you know, couple of years who have been buyers of other people's automation in the past, thinking that they it was just a question of buying automation and you can integrate it yourself. You know, they've obviously not had as much success with that as they would like to, which is why they've ended up coming and signing on to our platform, because they can see the benefits that brings versus the efforts they made with KNAPP shuttles or conveyors or AutoStore machines. We have got clients who have bought all these things in the past.
Thanks. Can I just have a second different one? Given the overcapacity in the UK market, is it tempting to close your oldest facility or is it too fully depreciated, and would it affect profitability too much?
I think that obviously, you know, when one has an overcapacity situation, you have to examine all of the options, and it's something the management at ORL and we would be looking at all the time. Obviously, we've not made any decisions in that space, and that's why, you know, we've not talked about it. The facility runs very well, the oldest facility, and has generated huge cash flows, and obviously we'll evaluate what's the best thing to do and when is the right time to update or renew one of those facilities.
Thank you. Sridhar Mamidala from UBS. A couple of questions then, please. I think, Stephen, given your answer just a little earlier on CapEx being similar for the next two years or so, does that mean we're modeling five go lives a year for the next sort of medium term? Is that what your expectation is?
I mean, that's a, that's a good guide as things stand today. I mean, I think that's probably less certain in fiscal 2025. Well, 2023, certainly. 2024, let's see. 2025, I'd put a qualification around that. It's a decent guide on run rate, and in fact, it's an important part of that modeling to cash flow positive. That means sort of less capital expenditure outflow over that time horizon, allowing existing sites to ramp into their modules and grow those fees.
To offset the CapEx and get us to cash flow positive. It's quite an important dynamic.
I think the other thing just you need to think, thinking about modules and drawing down modules. On the earlier sites we might have been more susceptible to the ramp-up of those sites in terms of the amount of CapEx that went in on day one versus the amount of drawdown the clients have. We, with the benefits of Reimagined and, and site optimization and other work that we're doing, are making ourselves much more in a space where the CapEx that comes out from us is about modules. If you build a six but you only draw down two, you make a contribution up front, that kind of should be relatively equal to the chassis that we put in so that you can have six.
The CapEx that we net put in should be reflective of the two, whether it's a six operating as a two or a two operating as a two. You see what I mean? What's really important isn't just how many new sites we have, it's how many modules our clients draw down. As we look at 2023, 2024, 2025, it's not just, well, they built five, they didn't do 9, or they did 9, they didn't do five. It's also the how many more modules did the clients that have already got sites draw down? We can see substantial growth in a year without any new sites if our existing clients ask, you know, pay for more modules in the existing sites.
Got you. Thank you. I guess maybe just to follow up on that, cash balance point, Stephen, you made.
Yes.
Comfortable with GBP 1.6 billion and not needing any further growth CapEx. Given this year we're already seeing sizable cash outflow even though CapEx is recalibrated, can you just talk a little bit through maybe the year, next year and the year after just to give us some comfort?
Yeah.
not needing further funding.
It's a combination of all the things we've talked about. It's sort of like that three-year horizon of the slightly reduced CapEx levels versus previous two years for the reasons we've talked about. At the same time, growing number of live modules, which Tim has just referenced. Really important is our central costs as well, and getting a grip on those and delivering that end game that we've guided to over a, you know, not necessarily completely linear, but you should be expecting to see certainly in group, central costs, support costs, a reduction year-over-year. Those are the sorts of key factors that will drive us to that cash flow.
We're expecting, you know, as a rough rule of thumb, a GBP 200 million or so cash flow improvement year-on-year for each of the next two or three years. That's the goal that we've set ourselves. There's a roadmap to get there. Those factors I've just described all combine together to deliver that roadmap.
Got you. Thank you.
I think just, you know, just to re-emphasize the point, the margin per module is improving. As we're showing you the cost of, you know, the engineering cloud costs per module coming down. For every module we've got out there, the contribution is getting greater. You can see there are more modules. It's more modules and more contribution per module driving the contribution, and then it's around what are the two costs that it needs to cover. One is the kind of central, you know, the finance team, the people team, the board and stuff. The other one is the technology R&D spend where we've both been supporting two platforms that we won't be doing anymore, and we've been building a lot of the plumbing and core infrastructure.
Even at this reduced level of spend that James is talking about, we will be adding new functionality at probably the fastest rate ever that the actual end customers and the clients will see. You know, whilst we've gone from a generation of 400 series bots to 500s to 600s, while we've been doing that, we've been working on the iterative improvement of the 500 and the development of the 600 at the same time. We don't need to develop a 700. The iterative improvement to the 600 is enough to take us for many years because of how far it's got to. There's many opportunities for James to reduce the spend while still actually delivering more functionality.
That means that that growing contribution per order times more orders needs to deal with less cost base. The cost base that James runs is what are the people that then is why we have a people team, if you see what I mean. If James needs less engineers, we need less of a people team. It's all a bit of a circular improvement. If as Mark grows his business, if he needs some more tech support, it will be fully funded by the margins that he's making in year. You know, we'll we can migrate some of the heads in that direction. It's a very, I think a very simple kind of trajectory to follow, in terms of why the cash flow improves year on year on year.