Over the past decade, the lawn and garden giant has quietly entrenched itself in the young and fast-growing industry. Its Hawthorne Gardening Company subsidiary has scooped up the biggest players in hydroponics, lighting and other supplies used for growing.
Now, Scotts is ramping up its involvement by throwing its lobbying weight behind legalization efforts, and funneling money into investments that could eventually enable the company to sell cannabis directly to consumers.
“It’s our belief, and this is not a grand revelation by any stretch: Federal legalization is obviously going to happen; the question is when and how,” said Chris Hagedorn, executive vice president of Scotts and division president of Hawthorne. “When it does, what are the most valuable assets going to be 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. “
Picks and shovels
“I want to target the pot market,” he said at the time. “There’s no good reason we haven’t.”
That’s it, Scotts couldn’t hop right in. Marijuana’s federally illegal status as a Schedule I substance prevents companies on the major stock exchanges from establishing “plant-touching” operations, such as cannabis growers, manufacturers and retailers.
So the company instead went the “picks and shovels” route by targeting the tools used to supply the industry.
“If people are stuck at home, what are they going to do? They smoke a joint and go garden,” Chris Hagedorn said. “And that’s pretty much what happened, so the consumer business [of Scotts] saw a huge boost, we did as well. “
In 2021, Hawthorne comprised nearly 30%, or $ 1.4 billion, of Scotts’ overall sales, up from 25% in 2020 and a 20% share in 2019, the company’s annual filings with the Securities and Exchange Commission show.
The next stage
But boom times don’t last forever. Supply chain challenges, rising inflation and consumers pulling back on spending have created choppy waters for many businesses, including Hawthorne, which saw sales drop by 44% to $ 202.6 million (Scotts’ overall sales declined 8% to $ 1.68 billion) during its second quarter.
Moreover, those in the cannabis industry are facing some unique pressures, Chris Hagedorn said.
“The current slowdown is really the result of a perfect storm that is hitting growers hard,” he said. “There is oversupply in key markets such as California and Oklahoma, and inflation is causing increases in the cost of raw materials and services. We expect the industry to bounce back as these key markets work through the excess supply and as new markets come online. in the Northeast over the next 12 to 18 months. “
The Northeast is expected to be home to some of the largest cannabis markets in the nation, once states such as New Jersey and New York reach maturity – likely four or five years after sales begin. New Jersey started selling adult-use cannabis last month; and New York, which is currently finalizing regulations and its licensing structure, is expected to begin sales later this year.
The region also holds some significance for the Scotts, which contributed $ 800,000 of the $ 1.3 billion raised by pro-legalization committees in New Jersey, and has connections to a New York cannabis operation.
In late March, a New York-based dispensary reached an agreement to be acquired by cannabis investment firm RIV Capital for $ 247 million. RIV Capital, headed by Scotts executive Mark Sims, is bankrolled in part by The Hawthorne Collective, a Scotts subsidiary.
Andrew Carter, a Stifel analyst who covers Scotts, said he believes the company has a strong long-term view.
“Absent some kind of change at the company, I would argue that they’re going to be a big player in cannabis, somehow, some way,” Carter said.
Chris Hagedorn said Hawthorne will continue to expand its presence in the industry:
“I hope we will be among the leaders. If not, I will be disappointed in myself,” he said.