Scotts Miracle-Gro's Diversification Bet: From Lawn Care to Cannabis.

Scotts Miracle-Gro, led by CEO Jim Hagedorn, diversified into the cannabis industry, but kept it a secret to avoid alarming investors and customers. The company's son, Chris Hagedorn, managed the new division, which aimed to reignite growth at the century-old lawn-and-garden company.

Scotts Miracle-Gro, the century-old lawn-and-garden company, took a strategic risk a decade ago by entering the cannabis industry through a subsidiary called Hawthorne Gardening Company. Led by CEO Jim Hagedorn, the company aimed to reignite growth by supplying materials and equipment to cannabis cultivators, a venture that was initially kept under wraps to avoid alarming investors and customers.

Jim Hagedorn, an Air Force veteran and son of Miracle-Gro co-founder Horace Hagedorn, oversaw the company’s consolidation of the lawn-and-garden industry in the 1990s and 2000s. However, growth slipped in the early 2010s due to the economic downturn and reduced consumer spending on lawns and gardens. Seeing cannabis as an untapped market, Hagedorn and his son, Chris, launched Hawthorne in 2014 to supply hydroponic nutrients and equipment to the cannabis industry.

Hawthorne's entry into the market was met with skepticism from cannabis cultivators who were wary of corporate involvement. However, the company's strategy of not interfering with existing operations and providing capital and R&D support helped earn their trust. Key acquisitions, such as Vermicrop and General Hydroponics, further solidified Hawthorne's position as a dominant supplier in the industry.

As more states legalized marijuana use, Scotts talked more openly about Hawthorne's business. Investors saw Scotts' stock as a way to invest in the cannabis industry without buying shares in a pot-growing company. The company's market capitalization more than doubled during the pandemic, reaching a peak of over $250 in early April 2021, according to FactSet.

However, the high didn't last. Skyrocketing demand during the pandemic led to increased production capacity, which resulted in a glut of unsmoked inventory and a crash in wholesale prices. Hawthorne's revenue slumped and losses mounted, turning Scotts' golden goose into an albatross.

Despite these challenges, Scotts remains committed to its cannabis venture. The company's new subsidiary, The Hawthorne Collective, allows it to make minority investments in the legal cannabis industry. However, the industry's classification as a Schedule 1 drug by the DEA and the inability to deduct ordinary business expenses on taxes have created a high-risk, low-return environment.

In conclusion, Scotts Miracle-Gro's entry into the cannabis industry through Hawthorne Gardening Company was a strategic move to reignite growth. While the venture has faced challenges, it remains a significant part of Scotts' business, offering investors a way to participate in the cannabis industry without direct exposure to pot-growing companies.

References:
[1] https://www.wsj.com/business/marijuana-scotts-miracle-grow-hawthorne-gardening-477ba85f