How Scotts Miracle-Gro's Weed Business Went Up in Smoke

Hey everyone, it's Jess.

I'm here to say that my colleague Oyan Adidoyan will be guest hosting today's episode.

Enjoy.

In the wake of the 2008 recession, Scott's Miracle Grow was struggling.

The gardening giant's customer base was drying up.

We had people spending less on their lawns and gardens because there were other things to prioritize spending on.

That's my colleague, Dean Seal.

The recession obviously hit consumers, but they also hit businesses.

So Home Depot, Lowe's, you know, they stopped building as many new stores.

And when your main retailer isn't building as many stores, you can't grow as rapidly as you were before.

But while gardeners were cutting back, a whole new industry was just starting to bloom.

Cannabis.

The first legal marijuana stores in Washington state opened their doors today.

Colorado became the first state to allow pot to be bought and sold for recreational use.

Virginia is the first southern state to legalize marijuana.

The Vermont legislature is one step away from legalizing marijuana.

By the early 2010s, medical cannabis had started to become bigger and bigger as more states were legalizing it.

We didn't really see recreational cannabis.

That wasn't a thing until Washington and Colorado legalized adult use cannabis.

And that's when the company started looking at cannabis.

Scott's Miracle Grow saw an opportunity to help cannabis growers by selling them supplies and equipment.

But for a major Wall Street company, getting into weed comes with risks.

Welcome through The Journal, our show about money, business, and power.

I'm Oyan Adadoyan.

It's Monday, August 25th.

Coming up on the show, how a company known for its weed killer became a weed champion.

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Scott's Miracle Grow's roots date back to 1868.

Since 2001, the company has been headed by CEO Jim Hagedorn.

He took over the business from his father, Horace Hagedorn, the founder of Miracle Grow.

Lawn and garden business is great.

And so people spending more time at home, they're more interested in beautifying their yard and their garden.

Nowadays, I think that if you think of potting mix, you know, the soil that you go to start your own gardens in, you're usually getting a Scott's Miracle Grow product.

So they're ubiquitous in a lot of ways.

You'll see them in Lowe's, Home Depot, Walmart.

They're all over the place.

And I think that they really are sort of a figurehead in that industry.

In 2008, growth at Hagedorn's company was stalling.

That's where cannabis comes in.

Around that time, states started easing restrictions on marijuana, allowing it for medical use.

And some, like Washington and Colorado, were even moving towards legalizing recreational use.

For CEO Jim Hagedorn, it smelled like an opportunity.

If you asked Jim, He would say that it sort of started in around 2011.

It was actually an interview with the Wall Street Journal where they were talking about, they were talking about a lot of different things, but at one point a reporter asked, you know, what about cannabis?

We see this medical market growing.

Do you think that there's room for scots in there?

And he said, well, absolutely.

It's a plant.

That's what we do.

We specialize in plants.

All plants need the same thing.

You know, they need nutrients.

They need soil.

They need sun.

And we know how those processes work, so why not?

But after that statement, Hagedorn met some resistance from people within his own company.

When he said that, there was a little bit of an outcry.

He told me that the lead director on his board and the audit chair on his board both gave him a phone call and said, like, hey man, you got to cool it.

He said they were nice about it, but pretty stern that, you know, that's not the industry that we're in.

Cannabis is still federally illegal.

But I think that it was still just sort of planted in Jim's mind.

I think that at the time, particularly when there was no adult use cannabis anywhere in the country, it just seemed really scary for any company to get into that space because you need financing and bankers know that, you know, if something is against the law, they don't really want to touch it.

Some states were moving towards legalization, but marijuana remains illegal at the federal level.

Hagedorn couldn't get Scott's Miracle Grow into the cannabis business, at least not directly.

So Hagedorn wanted to push into the industry without drawing too much attention.

And a year after he spoke with the journal, he found a way in.

He was flying out to Washington.

He He got waylaid on his way and had to stop in some small town.

And he went to an Ace Hardware there and he was looking around.

And usually at Ace Hardware, he would see nothing but Scott's Miracle Grow products everywhere.

But this was sort of a hydroponics oriented store.

And he was saying, like, where is the Scotts?

And he got to talking to the person behind the counter.

And he said, you know, we cater to hydroponics growers.

That's not Scott's Miracle Grow.

Hydroponics is a way to grow plants without soil, often used by urban gardeners and and by cannabis growers.

Hydroponics supplies have mostly been sold by smaller companies.

And they sort of wink-wink, they cater to hydroponics growers, people who grow green tomatoes, was the word that he used.

And both hydroponics and green tomatoes are apparently within cannabis cultivation, a little bit of a euphemism for growing pot.

So Jim saw it and he said, okay, well, that's new territory.

There's all these companies that are getting in on this.

How do Scotts get in on this?

Hagedorn wanted in on the hydroponics industry.

And to do that, he decided to acquire hydroponics companies and manage them under a subsidiary, the Hawthorne Gardening Company.

Hawthorne, by the way, is the English translation of Hagedorn, a German surname.

In 2014, Jim tapped his son, Chris Hagedorn, to run Hawthorne.

So how did Chris and Jim grow the Hawthorne business?

So, it started out with just kind of doing a roadshow of looking around and seeing what are the businesses that are already dominating this space and how do we get in good with them.

And so, they identified two of the biggest players in the market: that was General Hydroponics and Vermicrop, and they were supplying the cannabis industry.

So, they're not growing cannabis themselves, but they were supplying those materials that are needed to grow cannabis.

Scott's Miracle Grow met with the companies to strike up a deal, but initially they were hesitant.

A lot of these cannabis supply companies, you know, had been doing it for, some of them had been doing it for decades, and this was an industry that had sort of lived in the shadows for all of those decades.

They liked the lack of regulation for the most part because it allowed them to operate pretty freely.

And there was a sense that if we don't have a lot of people looking over our shoulder, we can grow the cannabis that we want to grow.

We can run the business the way that we want to run the business.

And so I think that was the skepticism is is suddenly if we start turning to this Wall Street company, then, you know, that's just going to invite more scrutiny on this space that had thrived without much oversight.

What did the Hagedorns do to try to ease this culture clash?

I think that Chris really understood the assignment to try to avoid...

giving off this feeling that they were corporate raiders or something like that.

He and his team would go to these meetings.

They would never wear suits.

They wouldn't even wear anything with Scott's branding because they just wanted to show that they were normal guys.

They weren't going to ask these companies to start doing things differently.

They didn't want a clean house.

They just wanted to find successful businesses and help build them, be it through capital or through resources like R ⁇ D.

And that strategy worked.

General Hydroponics and Vermicrop were open to working with Scott's Miracle Grow.

I spoke with the leader of those two companies who had been in the space for a long time.

And I think that he could see that Hawthorne was trying to be a little bit different from some of the private equity players and bigger companies that had tried to see if they could make an incursion in the space.

I think they saw Scotts as potentially being able to give cannabis a little bit more legitimacy.

And so they thought, well, if they can help give us legitimacy, maybe we can help give them a more reliable reputation here.

But the deal almost didn't happen.

Right before the deal was prepped to close, they get a call or a letter from from the Human Resources Department of Scotts saying, as part of this deal, all of your employees, they're now our employees and they are going to be subject to our marijuana drug testing.

And so those two companies said, listen, we've got hundreds of employees here.

They're already really nervous about having this big corporation coming in.

And now we have to go back and tell them that they have to start p-testing for marijuana.

Like,

we are in the marijuana business.

I don't think that's going to fly.

And it created a lot of consternation, enough so so that Vermicrop and GH said, no, we're not going to do this deal.

It's just, this is too much of a clash.

But I think Scotts understood that.

And so they ultimately backed down.

And not only did they back down, they eliminated marijuana drug testing for all of Scott's Miracle Grow.

And so, wow, yeah, the guys who I talked to in those supply companies, they said that for years after that, they were getting thanked by Scott's employees who were saying, Hey, we appreciate this change.

They created like a revolution within the company.

Absolutely.

In the end, the deal was signed, and Hawthorne was all set to go into the cannabis supply business.

I think that Hawthorne did a good job of establishing its reputation in the way that Chris had originally envisioned and following through on that.

For the most part, I heard a lot of really positive things from the people that I talked about of Hawthorne really not trying too hard to change anybody.

At the same time, you know, cannabis itself was getting a better reputation.

More states were legalizing it.

So as cannabis grew as an industry, so too did Hawthorne.

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By the late 2010s, Hawthorne's business was booming.

Because the industry was thriving, Hawthorne's customer's success was Hawthorne's success in a lot of ways.

They started out mostly doing those growing materials and some equipment, but then as the business was growing, they started to branch out into different product lines within cannabis cultivation.

So they started selling the lights that you use for indoor grows, they started selling water filtration systems, and ultimately, Hawthorne came to to dominate the space because they just sold everything that a cannabis grower would need.

I talked to multiple growers who said that kind of by the late 2010s, Hawthorne products were making up the majority of their grow operations.

So tell me about like how successful this business was.

They were making money, I'd assume.

Yeah, they were reeling in a lot of revenue.

I think with each new acquisition, they were opening themselves up to a lot of new customers.

And especially as we get into the pandemic, you you can see that suddenly, you know, Scott started posting the highest quarterly profits it ever had before, and Hawthorne was a huge contributor to that.

During the pandemic, consumption of marijuana reached new heights, and the company's stock price more than doubled.

Investors saw Scott's Miracle Grow as a way to invest in the cannabis industry without getting their hands dirty.

And as the industry became more mainstream, the company was able to be more open about its involvement with cannabis.

But that high didn't last forever.

When did things start to go south?

Ultimately, as the pandemic started to recede, cannabis consumption started to recede as well.

As demand started to subside, there was too much supply.

There was too much inventory.

So all these companies that had built out all their operations were just sitting on all this weed and they didn't really know what to do with it.

And so as a result, the price of the wholesale price of cannabis started to collapse.

And so I talked to Chris and he said that, you you know, there was one day that they were just sitting in there looking at the price of full sale cannabis just dropping and dropping and dropping.

And that's when the alarm bells started to go off.

What did that mean for Hawthorne?

So for Hawthorne, you know, they are dependent on the success of their customers.

So if their weed growing customers are either folding or having to slash their staff or not bringing in revenue, then that means that they can't continue to buy Hawthorne supplies.

And so there was not a lot of demand coming in for Hawthorne.

So suddenly, as that revenue started to slump, those profits turned to losses.

Those losses started to weigh on the bottom line of the big Scotts company.

And that's when they realized that maybe this big growth avenue had started to close.

And how bad exactly was the situation for Hawthorne?

What did this look like on the balance sheet?

I mean, the Hawthorne union itself started posting pretty major losses.

Over the last couple of years, that has then led to them realizing that they, just as the cannabis industry has started to kind of pull back because of its overbuild they had to do something similar with hawthorns

the hagadorans have been trying to right the ship cutting staff and trying to get back into profitability but the biggest obstacle for the company and the cannabis industry at large is federal law under federal law marijuana is classified as a class one drug the same category as heroin And it makes it really, really hard for any business that is touching that drug in any way to operate like a a normal business.

The biggest example of that is that they can't deduct ordinary business expenses from their taxes.

When you can't deduct business expenses, it's extremely hard to turn a profit.

If recreational marijuana were legalized on the federal level, what would that mean for Hawthorne and the industry at large?

Oh, I mean, that would be the gates opening.

That's what everybody wants in the industry more than anything else, because right now there's so many limitations on what a legal cannabis company can do.

They don't get treated like a real business in the eyes of the federal government.

And so if it were to be fully legalized, then suddenly that's, I mean, that's just full-scale legitimacy.

And that also opens up a lot of really interesting new avenues for maybe research into cannabis development, things that companies could really use to hone their products so that regulators can create nice frameworks.

There's a lot that could be unlocked if suddenly weed was legalized.

Has Hagnorn done personally anything to try to move the needle in that direction?

Oh, yeah.

He's been a big advocate for legal cannabis, particularly in the last few years.

When I spoke to him in early April, he was on his way that day actually down to Mar-a-Lago for a dinner with President Trump, where he wanted to push for the federal government to end its hostility towards cannabis.

And so he told me that he didn't get to make the pitch to Trump himself, but he did sit next to Susie Wiles, the chief of staff, and got to make his pitch there and just say that, you know, obviously

it's tough to suddenly go out to Congress and say, hey, make this fully legalized.

But there's all these smaller changes that could be made at the regulatory level that he's been advocating for.

President Trump has expressed support for easing some marijuana restrictions, but it's unclear if that might happen.

Since the Trump administration took over, we have not really seen any progress on the regulatory level.

But that said, there is a small change.

It's called rescheduling that would take cannabis from a Schedule I drug down to a Schedule III drug that a lot of people in the industry have been pushing for and that Trump said as recently as this month that he is interested in looking at.

Now, he hasn't necessarily said that he will make it happen or won't make it happen, but he said a decision will be coming in a few weeks.

So I think a lot of people in the industry are waiting with bated breath to see what that final decision is going to be.

If cannabis isn't legalized by the federal government, what does that mean for Hawthorne?

It means that we'll have to wait for more of that kind of piecemeal advancement in regulation to help the industry out.

But for Hawthorne, I think that they're really just ready to kind of disentangle the Scotts brand entirely at this point.

The Hagedorns are looking to sell Hawthorne Gardening by the end of the year, but they're not completely walking away from cannabis.

Dean says Scotts Miracle Grow is looking to sign a deal that lets them buy Hawthorne back if marijuana is legalized at the federal level.

I think it's safe to say that Scotts was somewhat burned by this whole experience.

And even if the Hagedorns are big proponents of the cannabis industry, and I'm sure they're going to keep a really close eye on it and see if there's a way to dip their toes back in at some point, I think it's safe to say that Hawthorne is a, it was an experiment that they're not going to pick back up until there's a much cleaner runway in front of them.

And what does the story tell you about the cannabis industry?

There's no question that cannabis has found its home in some ways in U.S.

culture, in U.S.

business.

But that said, they've kind of run into a wall now.

At this point, they need the federal government to catch up and they need to start getting some easing in the restrictions around this drug that is widely popular across the electorate.

I think a very high percentage of Americans believe that cannabis should be fully legalized.

Is there a lesson here for companies that are thinking about getting into the cannabis industry?

Maybe not necessarily a lesson.

It's sort of a moral tale, I think, of making a big bet and sometimes it looks like it's absolutely going to work out, and then it runs into a wall.

I think that a lot of companies can understand that.

You know, a lot of companies try to branch out into something new, they try to make a risky bet, they want to be that early mover.

But the tough part is being early can sometimes be just as bad as being wrong.

That's all for today, Monday, August 25th.

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