Douglas McCallum
Remuneration Committee Chairman

We believe that the remuneration of the Executive Directors appropriately and fairly reflects the performance of the Group."

Dear Shareholder,

On behalf of the Board, I am pleased to present the Directors' Remuneration Report for 2016.

We believe that the remuneration of the Executive Directors appropriately reflects the performance of the Group. In 2016, the retail business continued to see strong growth despite a difficult retail environment. The Group's Revenue grew 14.8% to £1,271.0 million, average orders per week grew 17.9% to 230,000 and EBITDA A grew 3.3% to £84.3 million for the financial year ended 27 November 2016. While the Group achieved strong sales and customer growth, it and the wider market suffered declining product prices, which impacted business Revenue and hence achievement against profitability targets under the incentive plans was modest.

Relationship Between Pay and Performance

We have recommended a bonus payment to the Executive Directors based on 43.7% to 44.1% achievement against objectives under the bonus plan for the period. This echoes the strong growth of the retail business.

During the period, we reviewed the performance against the 2014 LTIP award targets, which had a performance period ending on 27 November 2016. The 2014 LTIP awards were subject to the achievement of two equally weighted performance conditions, which were Group Revenue and earnings per share. Based on the 2016 results, the Directors achieved 42.76% against the performance targets. This was a result of an increase in the Group's EPS, excluding exceptional costs and share scheme awards, to 3.075 pence per share. The 2014 LTIP awards are expected to vest in March 2017.

Base salaries, which underpin retention of the Executive Directors, were reviewed during the period. An increase of 3% was approved, which is in line with the Group's employee salary percentage increase.

The Annual Report on Remuneration contains details of the remuneration paid to Executive Directors during the period.

Review of Directors' Remuneration Policy

One of the Remuneration Committee's key activities during 2016 was to undertake its periodic review of the Directors' remuneration policy, which is due for renewal in 2017. The Remuneration Committee are not proposing to make any substantive changes to the policy, and propose that the broad remuneration framework in terms of structure and the levels of incentive opportunities remains unchanged. However, in order to bring the Directors' remuneration policy further in line with best practice, a number of relatively minor changes are proposed. The policy changes, including the introduction of LTIP holding periods, are intended to further align it with best practice from a corporate governance perspective and with the expectations of many shareholders and representative investor bodies. A new Directors' remuneration policy will be put to all shareholders for approval at our Annual General Meeting on 3 May 2017. The Remuneration Policy Report contains details of the new Directors' Remuneration Policy that we propose to apply from the date of the AGM.

Key Changes to Executive Director Remuneration

We believe that our remuneration framework helps support and drive our strategy, which is focused on growing the retail business through improvement in the customer proposition and on maximising operational and capital efficiency of the retail business.

Our objective is also to invest in the Group's IP and technology to drive growth both in our retail business and platform business. The Remuneration Committee reviews the remuneration framework annually, to make sure that the AIP, the LTIP and the GIP contain specific performance measures that support this strategy.

During the financial year, we undertook a review of the Executive Director AIP structure and concluded that the financial measures of EBITDA A and Gross Sales (Retail) A remained aligned with the Company's strategy and should be retained for 2017 in order to encourage continued strong retail business growth. The proportion allotted to individual objectives has been maintained at 30%, to reflect the importance of delivering key strategic objectives in 2017, including new technology and CFCs.

The financial performance measures for the 2017 LTIP awards remain aligned with previous years' awards. One of the targets for the platform business will, unlike previous years' awards, be focused on expanding the Ocado Smart Platform business rather than the cost efficiency of the platform solution. This reflects the Board's focus on rewarding the delivery of both a broader platform solution that includes store pick fulfilment and sales of the platform solution to new customers, while continuing to incentivise improvements in operational efficiency.

Changes to Non-Executive Director Remuneration

The Non-Executive Directors' annual fees were subject to annual review and the basic fees for Non-Executive Directors were increased to £50,000 per annum (2015: £48,000). Fee levels have not changed since April 2014.

Shareholder Feedback and Remuneration Disclosure

In preparing the new Directors' Remuneration Policy, we sought feedback from shareholders on the main changes proposed. No concerns were raised by shareholders. Each year, we review how shareholders voted on the remuneration report, together with any feedback received. We are aware of shareholders' concerns regarding transparency of performance-related remuneration. To enhance our reporting of performance we included actual performance targets for incentive schemes for the first time in last year's report. We have included this information again this year and hope that it provides shareholders with clear and understandable information about the operation of our performance-related incentive schemes. Shareholder support for the resolution on the Directors' Remuneration Report has seen meaningful improvement in recent years, with 91.48% support at the 2016 annual general meeting.

I will be available at the AGM to answer any questions about the work of the Remuneration Committee.

Douglas McCallum

Remuneration Committee Chairman

31 January 2017

A See Alternative Performance Measures

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