During the last decade, the lawn and garden giant has quietly is rooted in the young and booming industry. Its subsidiary Hawthorne Gardening Company picked up the biggest players in hydroponics, lighting and other supplies used for cultivation.
Now, Scotts is stepping up its involvement, throwing its lobbying weight behind legalization efforts and funneling the money into investments that could eventually enable the company sell cannabis directly to consumers.
“It’s our belief, and it’s by no means a big reveal: federal legalization is obviously going to happen; the question is when and how,” said Chris Hagedorn, Scotts executive vice president and president. of Hawthorne Division. “When that happens, what will be the most valuable assets in a post-legalization world? I think anyone who thinks about it for a moment says that consumer-facing brands [that make and sell cannabis products] will be the most valuable.”
Pickaxes and shovels
“I want to target the pot market,” he said at the time. “There’s no good reason why we didn’t.”
To do this, Scotts could not intervene directly. The illegal status of marijuana at the federal level as a Schedule I substance prevents companies from major exchanges from establishing “hands-on-the-plant” operations, such as cannabis growers, manufacturers and retailers.
The company has therefore opted instead for the “pickaxes 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 gardening,” said Chris Hagedorn. “And that’s pretty much what happened, so the consumer business [of Scotts] seen a huge boost, so did we.”
In 2021, Hawthorne accounted for nearly 30%, or $1.4 billion, of Scotts’ overall sales, up from 25% in 2020 and a 20% share in 2019, according to the company’s annual filings with the Securities and Exchange Commission. Exchange Commission.
The next step
But boom times don’t last forever. Supply chain challenges, rising inflation and reduced consumer spending have created choppy waters for many companies, including Hawthorne, which saw sales fall 44% to 202.6 million (Scotts’ overall sales fell 8% to $1.68 billion) in its second quarter.
Additionally, players in the cannabis industry face unique pressures, Chris said Hagedorn.
“The current downturn is really the result of a perfect storm hitting producers hard,” he 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 key markets are operating on oversupply and new markets are emerging in the North East over the next 12-18 months.”
The Northeast is expected to be home to some of the largest cannabis markets in the country once states like New Jersey and New York come of age, likely four or five years after sales begin. New Jersey began selling cannabis for adult use last month; and New York, which is currently finalizing regulations and its licensing structure, is expected to begin sales later this year.
The area is also of some significance to Scotts, who has contributed $800,000 of the $1.3 billion raised by pro-legalization committees in New Jersey, and has ties to a cannabis operation in New York.
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, led by Scotts executive Mark Sims, is funded in part by The Hawthorne Collective, a subsidiary of Scotts.
Andrew Carter, a Stifel analyst who covers Scotts, said he thinks the company has a strong long-term view.
“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 said Hawthorne will continue to grow its presence in the industry:
“I hope we will be among the leaders. Otherwise I will be disappointed in myself,” he said.