2.1 Loss before tax

Accounting policies

Revenue

Revenue comprises the fair value of consideration received or receivable for the sale of goods and services.

Sales through the Webshop 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 charges are included in revenue.

Revenue is recognised at the point when the significant risks and rewards of products have been passed to the buyer and can be reliably measured; in general this is deemed to occur when customers take delivery of the goods. Income from "Ocado Delivery Pass", the Group's discounted pre-pay delivery scheme, is recognised in the period to which it relates on an accruals basis.

Cost of sales

Cost of sales represents the cost of groceries and other products the Group sells, any associated licence fees which are linked to 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 CFC1.

At the period end the Group is required to estimate supplier income due from annual agreements. Estimates are required due to the fact that the majority of these agreements end after the financial year end of the Group, which results in the Group only receiving firm confirmation of amounts due after the period end. This income is estimated on historical data and review of major contracts with suppliers.

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 and sublease payments receivable.

Employee benefits

The Group contributes to the personal pension plans of its staff through a defined contribution personal pension scheme which is administered by Standard Life. Employer contributions to the scheme are calculated as a percentage of salary based on length of scheme membership. Contributions are charged to the income statement in the period to which they relate.

Distribution costs

Distribution costs consist of 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.

Administrative expenses

Administrative expenses consist of 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 ESOS and the JSOS.

Exceptional items

Exceptional items, as disclosed on the face of the income statement, are 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.

2.1.1 Segmental reporting

The Group's principal activity is that of grocery retailing, derived solely from the UK. The Group is not reliant on any major customer for 10% or more of its revenue.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, as required by IFRS 8. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors.

The principal activity of the Group is managed as one segment. The Group does not split its activities into any further regional or product subdivisions in its internal management reporting, as any such split would not provide the Group's management with any meaningful information. Consequently, all activities relate to this one segment.

The chief operating decision-maker's main indicator of performance of the segment is EBITDA, which is reconciled to operating profit/(loss) below the income statement.

2.1.2 Gross sales


52 weeks
ended
27 November
2011
£'000
52 weeks
ended
28 November
2010
£'000
Revenue 598,309 515,688
VAT 36,508 27,285
Marketing vouchers 7,983 8,126
Gross sales 642,800 551,099

2.1.3 Operating profit/(loss)


Notes52 weeks
ended
27 November
2011
£'000
52 weeks
ended
28 November
2010
£'000
Operating profit/(loss) is stated after charging/(crediting) the following:


Cost of inventories recognised as an expense
400,878 344,796
Employment costs 2.1.4 113,331 96,739
Amortisation expense 3.1.1 5,460 4,474
Depreciation of property, plant and equipment 3.2.1 21,261 19,333
Impairment of property, plant and equipment, included in: 3.2.1 76 14
— Distribution costs
76 8
— Administrative expenses
6
Loss/(profit) on disposal of property, plant and equipment
38 (63)
Impairment of receivables
36 45
Operating lease rentals


— Land and buildings
2,878 2,347
— Other leases
481 413
Net foreign exchange (gains)/losses
(194) 147

During the period, the Group obtained the following services from its auditors:


52 weeks
ended
27 November
2011
£'000
52 weeks
ended
28 November
2010
£'000
Audit services

— Statutory Group and Company audit 47 40
— Statutory audit of subsidiaries 162 185
Non-audit services

— Advisory support 19
— Services pursuant to legislation and compliance† 975
— Other services 108

228 1,308

† Comprises primarily services in relation to the preparation for the Listing of the Company.

2.1.4 Employee information

Employment costs during the financial period were as follows:


Notes52 weeks
ended
27 November
2011
£'000
52 weeks
ended
28 November
2010
£'000
Staff costs during the period:


Wages and salaries
109,236 91,699
Social security costs
10,328 8,665
Pension costs — defined contribution plans
1,414 1,197
Share-based payments expense
596 320
Total gross employment costs
121,574 101,881
Staff costs capitalised 3.1.1 (8,243) (5,142)
Total net employment costs
113,331 96,739
Average monthly number of employees (including Executive Directors) by function:


Operational staff
4,567 3,835
Support staff
613 417


5,180 4,252

The share-based payments expense relates to the Group's equity-settled share schemes (see Note 4.7 for information on the Group's share option schemes). The prior period included a cash-settled share-based payment of £0.1m.

2.1.5 Exceptional items

There were no exceptional costs in the current period. In the prior period the Group incurred costs relating to its IPO. The portion allocated to profit and loss represents the portion of directly attributable costs relating to the secondary shares traded on Admission and other costs attributable to the Listing. Total costs expensed in the prior period were £3.5 million and related primarily to legal and professional fees.