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For Campbell Soup, Fresh Foods Prove a Struggle

In a major undoing of the strategy pursued by its former CEO, Campbell Soup said today that it would sell its fresh foods business, which includes the Bolthouse Farms and Garden Fresh brands, as well as its refrigerated soup line.

The decision came after a strategic review, which followed the abrupt departure of the company’s then-chief executive Denise Morrison in May as Campbell struggled through a prolonged sales slump. The company also plans to sell its international business. Taken together, the two segments represent about $2.1 billion in net sales.

“Our plan will build upon our existing strengths,” the company’s board of directors said in a statement. “Our new leadership team will concentrate on significantly improving operational discipline through a rigorous management model that aligns the enterprise from strategy through execution.”

In August, the Wall Street Journal reported that activist investor Daniel Loeb had taken a more than $300 million stake in the company and was pressing for change.

During her tenure, Morrison was attempting to “shift the gravity” at the company, she told Fortune in 2015, as Campbell Soup faced a dramatically changing consumer—particularly shoppers turning their backs on the processed fare that had long fueled Campbell and its Big Food brethren.

Morrison invested in a category she called “packaged fresh”—items like refrigerated drinks that sit in the perimeter of the grocery store, where consumers were spending more of their time and money.

The strategy included the acquisition of Bolthouse Farms and its bagged carrot business in 2012, and refrigerated hummus and salsa maker Garden Fresh Gourmet in 2015. Both brands are part of the fresh division that the company wants to divest.

Despite Campbell’s decision to rid itself of the fresh business—which was operating at a loss—Morrison was not wrong in her core hypothesis: The way consumers are eating has changed and continues to evolve. The company’s decision instead should be viewed as an indication of how hard it is to get fresh food right.

“I think it’s pretty clear that consumers are looking for fresher foods,” Credit Suisse analyst Robert Moskow told me last month, “but from a traditional packaged food perspective, these big companies have had a lot trouble figuring out how to capitalize on it.”

In fresh food, the products are more commoditized, there are few well-known brands, the supply chains are more complex, and the margins are lower than packaged goods.

Morrison liked to say that the Bolthouse deal turned Campbell into an “organic carrot farmer” but it soon food that it wasn’t such an easy endeavor. In September 2016, the company said it harvested carrots too early, which resulted in smaller carrots and unhappy customers. In November 2017, carrots came up 29 times on Campbell’s earnings call as unfavorable weather hurt yields. “It proved more challenging than they initially anticipated,” Morningstar’s Erin Lash told Fortune in July.

“It’s more execution,” says Moskow. “The demand was always there.” The segment’s low margins mean there’s not a lot of room for error, he added. And there are some issues, like weather, which are beyond the company’s control.

“You can be really good at shelf-stable snacks and canned food, and I just don’t know if those skill sets translate well to a more commoditized produce-related product line,” he said.

Moskow says he has struggled to find an example of a packaged foods company doing fresh well.

In June, Bloomberg reported that Danone is exploring a sale of produce brand Earthbound Farms, which it obtained as part of $12.5 billion acquisition of WhiteWave in 2017.

Morgan Stanley noted at the time that “it is a growing category, but inherent volatility and lower margins mean that we view the business as a less attractive part of Danone’s portfolio.” A sale would “remove a top-line margin drag.”

Morgan Stanley noted that the fresh category had low barriers to entry, limited opportunity for innovation, and that the “seasonal nature of produce and climate-led change in quality of produce tend to impact sales of fresh fruits/vegetables.”

“At a certain point in time, we might explore the strategic rationale and ask ourselves the question if we are the best operator for the fresh food activities or not,” Danone spokesperson Marion Cocherel wrote in a statement to Fortune. “However, no decision has been made yet and we are working hard to turn the business around.”