Scotts stakes new claim in pot
Development of hydroponics could be a moneymaker.
Scotts Miracle-Gro built a multibillion-dollar business by being a market leader across several categories of the lawn-and-garden industry.
The problem? Those categories weren’t growing all that fast.
To boost sales, Scotts took a page out of Big Beer’s playbook and crafted a subsidiary called Hawthorne Gardening Co. to create and capture portions of the booming urban gardening and hydroponics market — an industry bolstered by home growers of cannabis.
Scotts CEO Jim Hagedorn and his son Chris, general manager of Hawthorne, say they are betting big on legal marijuana and believe that with a couple of strategic investments they can quickly build $1 billion in new revenue.
Chris Hagedorn spoke with The Cannabist about Scotts’ plays in hydroponics — moves that analysts say could set the stage for other large companies to invest in the legal marijuana market.
“I think there’s a bigger market out there,” Chris Hagedorn said. “It’s a phenomenal growing technique; you can grow plants, bigger, faster in a more controlled manner. Right now, we’re squarely focused on what’s made this business successful: high-value crops.” It all started in Boulder. In early 2013, AeroGrow International was clawing out of a rough patch that included a shift in business model, low liquidity, layoffs and a warning from auditors that the Boulder-based maker of indoor gardens might not be financially viable.
At that time, the younger Hagedorn was cutting his teeth at Scotts, working regional sales and marketing in the company’s Port Washington, N.Y., office. But he saw greater opportunity beyond the core lawnand-garden business.
He approached his father with idea of urban gardening.
Beyond AeroGrow, urban gardening had a dearth of products and major players at that time, Chris Hagedorn said. And Scotts’ lines were not designed for the urban gardener’s needs, and space and storage considerations.
That’s when Scotts looked more closely at AeroGrow and decided to “place a small bet and see how it went,” Hagedorn said.
Scotts’ SMG Growing Media subsidiary invested $4.5 million in April 2013 to secure a roughly 30 percent stake in AeroGrow.
The cash and Scotts’ support allowed AeroGrow to retire some debt, inject life into product development and gain access to broad retail channels, AeroGrow CEO J. Michael Wolfe wrote in an e-mail.
AeroGrow nearly tripled its sales to $19.6 million in its 2016 fiscal year, from $7.3 million in 2014, Wolfe said. Sales were up 37 percent in the just-completed first quarter of fiscal year 2017.
Scotts’ SMG subsidiary, which now has a 45 percent stake in AeroGrow, this year said in U.S. Securities and Exchange Commission filings that it may elect to increase its stake in the Boulder company to 80 percent. Scotts is publicly traded.
Enter Hawthorne
In 2014, with the initial results out of AeroGrow trending positive, Scotts upped its game in hydroponics, creating Hawthorne Gardening to manage some unique Scotts brands, such as Black Magic potting soil, and wrap in natural and organic offerings as well as hydroponics supplies.
The company assembled a small team and envisioned operating the indoor gardening group separate from Scotts as a whole — much in the way multinational beer giants approach their craft beer-focused brands.
The crew went to Chicago to meet with MillerCoors brass to learn more about the Tenth and Blake Beer Co., the division responsible for brands such as Blue Moon, Crispin and Killian’s.
Chris Hagedorn said he was intrigued by how operators of Tenth and Blake steered elements such as creativity and marketing, while the back-of-the-house tasks would be passed along to the big guns upstairs.
“That was the concept: Allow us to focus on the fun stuff that really matters,” he said, “And allow the mother ship to really worry about the other stuff.”
And in the same way AnheuserBusch InBev has been buying well-established regional craft brewers in the U.S., Hawthorne has dropped large sums of cash for leaders across the hydroponics industry.
First came the $130 million buyout of General Hydroponics, a California maker of nutrients and hydroponics systems.
“When we first started doing the General Hydroponics deal, we thought we were ahead of the game,” Hagedorn said.
Then Hagedorn started to notice other suitors sniffing around companies on the Scotts and Hawthorne wish lists. So Hawthorne picked up the pace, snapping up lighting company Gavita and nutrients firm Botanicare.
The companies all were successful on their own, and Hagedorn said he was well aware of potential integration troubles — and cautious about the “well-intentioned, but potentially harmful” influence of Scotts.
“We were really worried about the cultural impact within General Hydroponics,” he said. “Without intending to, are we going to shove too much corporate crap down their throats?”
Hawthorne now is about twothirds of its way to a goal of investing $500 million in the hydroponics space and expects to pull back from additional major transactions, officials told investors in early August.
The Hawthorne subsidiary recorded a sales spike of 300 percent from last year and is on pace to surpass $250 million in revenue. General Hydroponics’ sales growth has run at a consistent 20 percent tick and has seen revenue upswings each time a new state legalizes marijuana in some capacity, he said.
“The lion’s share of General Hydroponics business in North America is cannabis growers,” Hagedorn said. “I’m not going to pretend otherwise.”
For AeroGrow to start catering to pot growers would require some technology tweaks, Hagedorn said. AeroGrow’s Wolfe said his company is already developing larger AeroGardens designed to grow bigger crops.
“Our mission is to make the world’s best smart indoor gardens,” Wolfe wrote. “We’ll leave it to our customers what they might want to grow with this new generation of AeroGardens.”
Hagedorn said he’s excited about the potential that these hydroponic systems could have in places where the local food supply is unreliable or the land isn’t suitable for growing food.
It makes sense that Scotts would want to augment its growth by expanding into other areas such as organics and hydroponics, said analyst Joseph Altobello, who covers Scotts Miracle-Gro for investment company Raymond James.
The cannabis industry’s role in hydroponics may generate some snickers on Wall Street, but legalization is happening across the country, he said.
“And (Scotts wants) to be able to supply that industry with growing media,” he said.
Scotts’ board of directors took some convincing, said Harrison Phillips, an analyst with Viridian Capital Advisors, a New Yorkbased financial advisory firm in the cannabis industry. But money talks. “They’re hunting for growth, and their investors are looking for growth,” he said.
If the efforts prove to be financially successful, they may ultimately lower the risk tolerance not only for Scotts but for other large firms that are sitting on the sidelines for now, Viridian president Scott Greiper said.
“The emergence of the largescale, very well-capitalized acquirer is critical to bring more institutional private equity, more professional investors in this space,” he said.
The obvious entrants and potential acquirers, Greiper said, include pharmaceutical companies, traditional commodity growers such as tobacco, agrochemical firms such as Monsanto, liquor companies interested in buying infused products brands and then software companies across all aspects of the industry.
This year, Microsoft Corp. entered into a partnership with Kind Financial, a seed-to-sale services provider in the industry.
Most large companies are holding back as marijuana remains federally illegal, but also because the industry is just over $5 billion in sales, Greiper said.
Competitive concerns
The emergence of Scotts, let alone the other companies on Greiper’s list above, has caused some queasiness in the industry, said Michael Bologna, founder and CEO of Green Lion Partners. The Denver company works closely with startups in cannabis and founded Natural Order Supply, a distributor of supply-chain products such as HVACs, recurring consumables and nutrient lines.
Various message boards dedicated to hydroponics include threads about the fears and potential consequences the involvement of Scotts, a firm that partners with Monsanto Co.
“The pushback is the reputational risk that Scotts brings to the table with (its) relationship with Monsanto and (Scotts’) history of selling chemical-based, environmentally damaging products,” Bologna said.
Not all garden companies are concerned about the emergence of a deep-pocketed competitor.
John-Paul Maxfield, founder of Denver-based Waste Farmers, has positioned his B Corporation as the “Whole Foods to the Cargills and Monsantos” of the agriculture industry. Waste Farmers’ natural and organic Batch:64 line of soils are marketed to the “new breed of farmer” — the legal, professional cannabis grower.
“They don’t know this farmer, and acquisitions aren’t going to help them know it,” Maxfield said of Scotts. “There’s no concern on that end.”
Maxfield’s optimism is boosted by the 100 percent annual sales growth his company has recorded and the initial traction gained by the Organic Cannabis Association, an organization he co-founded to develop organic standards for the production of legal marijuana.
Hawthorne Gardening, he said, has a financial disincentive to push the type of organic and sustainable system Waste Farmers is promoting.
“From a practical perspective,” he said, “I think that disruption happens at the fringes.”