How did ScottsMiracle-Gro become a cannabis powerhouse?
Cannabis legalization continues to advance in the United States and beyond, creating economic opportunities for businesses in many industries. Much of the investment in the cannabis economy has gone into new companies that do most of the growing, processing and selling of marijuana, some of which have grown into large operations spanning many states. . But increasingly, more mature companies are getting into cannabis, often through ancillary businesses that serve the needs of plant-contact operations. One of the first to adopt this business strategy is ScottsMiracle-Gro, a 154-year-old company that is a staple of American garden centers.
Targeting the pot market
ScottsMiracle-Gro is probably best known for the fertilizer and weedkiller combo found in the lawn spreaders of millions of suburban dads and the plant food in the watering cans owned by a similar number of grandmothers across the country. But over the past decade, the company has taken a deep dive into cannabis, with its subsidiary Hawthorne Gardening Company picking leaders in marijuana grow lights, nutrients, hydroponic supplies and more. And recently, Scotts pushed for the legalization of marijuana at the federal level. It’s a prospect that Chris Hagedorn, executive vice president of ScottsMiracle-Gro and president of the Hawthorne division, says is inevitable.
“It’s our belief, and it’s not a big reveal at all: Federal legalization is obviously going to happen; the question is when and how,” Hagedorn told CNN in a recent interview. “When that happens, what will be the most valuable assets in a post-legalization world? I think anyone who thinks about it for a while says consumer-facing brands [that make and sell cannabis products] will be the most valuable.
In 2011, ScottsMiracle-Gro CEO Jim Hagedorn, Chris Hagedorn’s father, told The Wall Street Journal that he saw opportunities for the company in the emerging legal cannabis sector.
“I want to target the pot market,” he said. “There’s no good reason why we didn’t do it.”
As a publicly traded company, ScottsMiracle-Gro has been unable to dive deep into legal cannabis with operations to grow, process, or sell marijuana due to the plant’s federal illegality. Instead, the company shopped for companies serving the booming market. In 2013, the company launched its new venture with a $4.5 million investment in Colorado-based indoor gardening products company AeroGrow.
“We see a long-term opportunity in using AeroGrow’s technology to grow the indoor gardening category, as well as expanding the ‘pod’ technology outdoors,” said Jim Gimeson, then senior vice president and general manager of gardens at ScottsMiracle-Gro. in a report. “Furthermore, we see an opportunity for these products to perform well in international markets where houseplants are very popular with consumers.”
Since then, ScottsMiracle-Gro’s leap into the cannabis industry has continued with notable ancillary companies including indoor gardening and nutrient supply company General Hydroponics, grow light manufacturer Gavita and the maker of Botanicare nutrients all part of the Hawthorne family of brands. Scotts’ focus on companies that offer products that appeal to commercial growers and home growers has positioned it well to survive the pandemic, at a time when garden centers and home improvement retailers have seen strong sales. .
“If people are stuck at home, what are they going to do? They smoke a joint and go gardening,” Chris Hagedorn said. “And that’s pretty much what happened, so the consumer business [of Scotts] saw a huge boost; U.S. too.
In for the long haul
Last year, Hawthorne Division sales were $1.4 billion, or 30% of Scotts’ total sales. In 2019, Hawthorne was responsible for a fifth of ScottsMiracle-Gro’s sales, reaching a 25% share of the company’s revenue in 2020. But supply chain issues and other economic factors led to a slump at Hawthorne, sales fell 44% to $202.6 million in the second quarter of this year.
“The current downturn is really the result of a perfect storm hitting producers hard,” Chris Hagedorn said. “There is oversupply in key markets such as California and Oklahoma, and inflation is driving up the cost of raw materials and services. We expect the industry to rebound as these markets keys are operating with oversupply and new markets coming online in the North East over the next 12-18 months.
The drop in sales led ScottsMiracle-Gro to cut its full-year revenue and adjusted profit guidance. The company said it expects U.S. consumer sales to decline between 4% and 6%, with Hawthorne sales expected to fall 40% to 45% for the year ending September 30.
“The revised advice we provide is our best estimate of the current situation in a fluid and rapidly changing market,” Jim Hagedorn said last week. “As we strive to deliver the best results for fiscal 2022, we are focused on the future.”
ScottsMiracle-Gro is also testing the waters for a possible dive into the herbal side of the cannabis industry. In March, RIV Capital Inc, a cannabis investment firm backed in part by Scotts subsidiary The Hawthorne Collective, reached an agreement to acquire New York-based licensed cannabis cultivator and retailer Etain.
Andrew Carter, an investment analyst who tracks ScottsMiracle-Gro for Stifel, said he thinks the company is well positioned for the long term.
“Absent some sort of change in the business, I would say they’re going to be a big player in cannabis, one way or another,” Carter said.
Chris Hagedorn says Hawthorne will continue to expand into the cannabis industry.
“I hope we will be among the leaders,” he said. “Otherwise I will be disappointed in myself.”