The problem? Those categories weren’t growing all that fast.
To augment sales, Scotts took a page out of Big Beer’s playbook and crafted a wholly owned subsidiary called the 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, who heads Hawthorne, both have put it bluntly: They’re 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, general manager of Hawthorne, 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.”
Dipping toes in the water
It all started in Boulder, Colo.
In early 2013, Boulder-based AeroGrow International, a maker of indoor gardens, was continuing to claw its way out of a rough patch that included a shift in business model, low liquidity, layoffs and a going concern qualification from its auditors indicating that the company may not be financially viable in the future.
At that time, the younger Hagedorn was cutting his teeth at Scotts by working regional sales and marketing out of the company’s Port Washington, N.Y., office. The experience there was worthwhile, but Hagedorn saw greater opportunity beyond the core lawn-and-garden business.
He approached his father and volleyed up the idea of urban gardening.
Beyond AeroGrow, urban gardening had a dearth of products and major players at that time, Chris Hagedorn said. And Scotts’ line of offerings were not designed for the urban gardener’s needs, space considerations and storage capabilities.
That’s when Scotts took a closer gander at AeroGrow.
“We saw a business that was in a tough position,” Chris Hagedorn said, adding that Scotts decided to “place a small bet and see how it went.”
Scotts’ SMG Growing Media subsidiary invested $4.5 million to secure a roughly 30 percent stake in AeroGrow.
The foray was fruitful for both entities, said Hagedorn and J. Michael Wolfe, AeroGrow’s president and chief executive officer. The $4.5 million infusion and Scotts’ support allowed AeroGrow to retire some debt, inject life into new product development and gain access to broad retail channels, Wolfe wrote via e-mail.
Since Scotts acquired the equity stake in April 2013, AeroGrow nearly tripled its sales to $19.6 million in its 2016 fiscal year, from $7.3 million in 2014, Wolfe said. The company’s growth has been accelerating with a 37 percent sales increase in the business’ just-completed first quarter of fiscal year 2017, he added.
Scotts’ SMG subsidiary, which now has a 45 percent stake in AeroGrow, disclosed earlier this year that it may elect to increase its stake in the Boulder company to 80 percent via a warrant exercise, according to documents filed with the U.S. Securities and Exchange Commission.
In 2014, with the initial results out of AeroGrow trending positive, Scotts upped its game in hydroponics by creating a subsidiary called the Hawthorne Gardening Co. 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 forged a small team and envisioned operating this indoor gardening group separate from Scotts as a whole — much like how multinational beer giants approach their craft beer-focused brands. To an outsider, it’s not obvious that Scotts owns Hawthorne; It appears as if it’s a smaller and completely different firm, said analyst Joseph Altobello, who covers Scotts Miracle-Gro for investment company Raymond James.
Hagedorn and crew traveled 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. Hagedorn said he was intrigued at how operators of the Tenth and Blake division steered aspects 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, allow the mothership to really worry about the other stuff,” Hagedorn said.
Another parallel to the beer industry can be drawn in Scotts’ acquisition strategy. Much like how Anheuser-Busch InBev has been trotting around the United States buying well-established regional craft brewers, Hawthorne Gardening Co. has dropped large sums of cash to wrap in the sector leaders across the hydroponics industry.
First came the $130 million buyout of California-based General Hydroponics, a maker of nutrients and hydroponics systems.
“When we first started doing the General Hydroponics deal, we thought we were ahead of the game,” he said.
Then Hagedorn started to notice other suitors sniffing around hydroponics companies on the Scotts and Hawthorne wish lists. So Hawthorne picked up the pace and accelerated its plans, snapping up lighting company Gavita and nutrients firm Botanicare, he said.
The acquirees were all successful on their own, and Hagedorn said he was well aware of potential integration troubles — and cautious, too, 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 bullshit down their throats?”
Hawthorne now is about two-thirds of its way to a goal of investing $500 million in the hydroponics space and expects to pull back from additional major transactions in the sector, officials told investors in early August. The subsidiary has 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 ran at a consistent 20 percent tick and has seen revenue upswings each time a new state legalizes marijuana in some capacity, he said.
“I’m not going to lie, the lion’s share of General Hydroponics business in North America is cannabis growers,” he said. “I’m not going to pretend otherwise.”
If AeroGrow were to start catering to growers of the “high-value crop” of marijuana, it would take some tweaks of the AeroGarden’s technology, Hagedorn said. AeroGrow’s Wolfe, when addressing this topic, said that his company is developing larger AeroGardens that can produce bigger harvests.
“Our mission is to make the world’s best smart indoor gardens,” Wolfe wrote. “We’re in development of several new products designed to grow bigger crops and harvests than ever. We’ll leave it to our customers what they might want to grow with this new generation of AeroGardens.”
In a long-term view, Hagedorn said he’s excited about the potential that these hydroponic systems could have in providing sustenance in places where the local food supply is unreliable or the land isn’t suitable for growing food.
Big money, big influence
It makes sense that Scotts would want to augment its growth by expanding into other areas such as organics and hydroponics, said Raymond James’ Altobello.
The cannabis industry’s role in the latter may generate some snickers on Wall Street, but legalization is happening across the country, he said.
“I think it’s a matter of time before you see more states legalize it,” he said. “And (Scotts wants) to be able to supply that industry with growing media.”
Jim and Chris Hagedorn’s desires to jump into the ancillary side of the booming cannabis industry were met with skepticism from Scotts’ board of directors, said Harrison Phillips, an analyst with Viridian Capital Advisors, a New York-based financial advisory firm in the cannabis industry.
Ultimately though, 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 also for other large firms that are sitting on the sidelines for now, said Scott Greiper, Viridian’s president.
Greiper said that “other than Scotts, there have been no substantially large” companies making a move into the market to-date. “The emergence of the large-scale, very well-capitalized acquirer is critical to bring more institutional private equity, more professional investors in this space.”
An additional factor noted by Greiper is the “emergence of the exit” — a means such as an acquisition or a public offering, which would allow investors to capitalize on their financial ventures.
The obvious entrants and potential acquirers in the cannabis industry, 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.
Earlier 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, he said. Noting the former, Greiper said that Scotts’ board has been reticent about Jim Hagedorn’s ideas related to genetically modified cannabis as that would move the company beyond just an ancillary capacity.
The emergence of Scotts, let alone the potential other companies in Greiper’s list above, has caused some queasiness in the industry, said Michael Bologna, founder and CEO of Green Lion Partners, a Denver-based company that works closely with startups in cannabis. The firm founded Natural Order Supply, a distributor of supply-chain products such as HVACs, recurring consumables and nutrient lines.
“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, with an eye on having a positive influence on the community and environment. Waste Farmers’ natural and organic Batch:64 line of soils are marketed to who Maxfield views as 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. The OCA’s mission is to develop organic standards for the production of legal marijuana, he said.
Maxfield, noting Scotts’ partnership with Monsanto, argues that Hawthorne Gardening has a financial disincentive to push an organic and sustainable system like Waste Farmers is promoting.
“There always needs to be a David and Goliath,” he said. “For (Jim Hagedorn) and his generation, that line of thinking makes sense. I think it’s a reflection of being out of touch with where the market is going. From a competitive perspective, I’m thrilled that they’re of that mind-set, because it means they’re going to lose in the end; from a practical perspective, I think that disruption happens at the fringes.”
Chris Hagedorn is well aware of the rebuke Scotts and Hawthorne have received. The negative reaction “bums me out,” Hagedorn said.
“I get it, I totally get it,” he said. “At Hawthorne, we really do try to think of ourselves and we feel like a small business. But I know we’re a subsidiary of Scotts … We’re not going to pull the wool over their eyes.”
Hagedorn said he hopes that the opposition within the industry will warm up to Hawthorne in the years to come and closely watch how the company behaves within the industry.
“I hope they’ve seen that we aren’t the bogeyman that they thought we were,” he said.