Is Fresh and Organic Food a Losing Battle for Campbell Soup Company?

By Nicholas Rossolillo Markets Fool.com

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Image source: Campbell Soup Company.

Campbell Soup Company (NYSE: CPB) reorganized its business to create a fresh foods division a few years ago, but so far, it has failed to deliver the growth the company was hoping for. With management recently indicating that fresh and organic foods will struggle across the industry, it may be time for the company to look elsewhere for a boost.

How Campbell got into fresh food

Campbell breaks its business into three basic parts: Americas simple meals and beverages, global biscuits and snacks, and Campbell fresh. Where the first two units focus on prepared foods, including the iconic namesake canned soups, V8, and Goldfish crackers, the fresh division's primary goal is to serve the health-and-wellness crowd.

The company restructured how it organizes its business after acquiring the Garden Fresh Gourmet dips-and-chips maker last summer for $231 million. That was combined with the Bolthouse Farms business (which makes premium drinks, salad dressings, and fresh carrots) and Campbell refrigerated-soup division.

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The move wraps up a multi-year string of acquisitions aimed at capturing consumer interest in fresh and healthy offerings -- Bolthouse was purchased in 2012 and Plum organic baby food in 2013. Even though families are getting more conscious of what they're eating, these efforts have not been a slam dunk for Campbell.

How Campbell fresh and organic foods have fared

The Campbell fresh division has been a drag on the overall company in 2016, especially after a voluntary recall of Bolthouse Farms Protein Plus drinks and poor execution in the carrot business earlier in the summer. As a result, the management team was replaced, and the division is in recovery mode.

But problems in the fresh food division had started to mount even before the summertime woes. Since the segment was created, sales have been slowing on a year-over-year basis and have been all over the board sequentially.

Data source: Campbell quarterly reports. Chart by author.

One might expect more substantial growth in this business, not only because of strong consumer interest in healthy eating but also because the division is by far Campbell's smallest unit. At the end of the most recently reported quarter, the fresh foods unit made up less than 11% of total sales. With performance coming in as it has, the division is not living up to its stated goal of being an up-and-comingdriver ofoverall growth.

To be fair, managementcalled out food sales overallduring the last report. CEO Denise Morrison had this to say on the earnings call:

Across the industry, top line growth remains sluggish. Simultaneously, food deflation is pressuring both top and bottom lines and limiting pricing opportunities. This is driving a hypercompetitive environment for market share along with a continued focus on cost savings measures to deliver earnings. As we've seen, many food companies have reported flat to declining organic sales in their most recent quarters.

The long and the short here is that Campbell is not the only company to try to make hay off consumer trends. A combination of intense competition and insufficient demand for the fresh food all these companies are pouring into the market have hurt top and bottom line results.

Is it time to look elsewhere?

The good news is that people will never stop eating. Campbell hasn't pigeonholed itself as solely a fresh and organic food maker. In fact, most of its business is still derived from its traditional business of ready-to-eat soups and other snacks. The company can afford to stick with its newer venture and ride out the slump.

Management feels a rebound in its fresh division is in the making for 2017, and initial indications confirm that is happening as sales grew quarter-over-quarter. Over the long-term,that segment should provide the boost the company and investors are looking for as consumers continue to look for healthier options.All things considered, it's far too early to write Campbell out of this game despite recent struggles.

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