July 21, 2016

Jim Hagedorn, CEO of Scotts Miracle-Gro since 2001, plans to re-energize his company and counter flat sales by investing in the legal cannabis production industry.

Between 2001 and 2009, Scotts saw its revenues increase by 80% as giant retailers including WalMart, Home Depot and Lowe’s expanded across the U.S., building more than 3,000 stores. However, with 2008 came a widespread economic slowdown, then recession that stalled Miracle-Gro’s growth ever since.

An opportunity takes shape

However, speaking of the potential for cannibis, Hagedorn told Forbes, “It’s the biggest thing I’ve seen in lawn and garden.”

The idea took root in 2013 when Hagedorn visited a garden center in Washington State, where he found very few Scotts products being sold but many hydroponic supplies used for indoor cultivation of marijuana and other plants. The owner of the center told Hagedorn that the average customer at the retail site spent an average of $400 cash on hydroponic supplies.

Although long taboo, the legal marijuana industry is expected to see sales of $6.7 billion this year compared to sales of $5.4 billion last year according to ArcView Market Research, reports Market Watch, and if key states such as California join in legalization, sales could top $25 billion.

That’s when Hagerdon decided that Scotts would enter the cannabis sector. He recalled to Forbes telling his team, “If you don’t like it, leave. We’re doing it. It’s beyond stopping. And we’re not getting into pot growing. We’re talking dirt, fertilizer, pesticides, growing systems, lights. You know it’s a multibillion-dollar business, and we’ve got no growth in our core. Are you guys stupid?”

Investments take shape

That was in 2013 and last year, Hagerdorn invested $135 million in General Hydroponics and its sister company, Vermicrop – two California-based providers of production inputs including fertilizers, soils, accessories, and equipment to legal marijuana growers. These operations have since been folded into Hawthorne Gardening, a subsidiary of Scotts being run by Hagedorn’s son, Chris. These acquisitions were followed by an investment of $120 million for a 75% stake in an unnamed Amsterdam-based hydroponic equipment supplier.

Miracle-Gro also began selling Black Magic – its own line of hydroponic soils and equipment through 141 Home Depot stores in the states of Washington and Colorado, the two states to legalize recreational marijuana. Indeed, in a move that many might see as pushing the boundaries, Miracle-Gro aired a 30 second commercial for Black Magic during this year’s NBA finals. With a price point of $16 per bag, more than twice the price of mainstream potting soil, and legal cannabis carrying a value of $2,000 per pound, the Hagedorn’s expect the division to reach a market value of $1 billion.

A larger trend

As legalization of medical and recreational marijuana expands state by state, and the industry as a whole gains traction and gravitas, other major companies have also begun to invest. In June, tech giant Microsoft and cannabis industry-focused company, KIND Financial announced that they have entered into a partnership under which KIND will use Microsoft’s cloud platform to build out its offerings, and a Microsoft team will assist clients with tracking transactions and navigating laws, while also ensuring that product does not end up on a black market.

Cannabis has also received increased investment attention in the form of fund formation, including the launch of the $100 million MedMen Opportunity Fund last month and Canna Groups launch of private equity fund Sugar Leaf Capital Fund I LLC in November of 2015.

Looking ahead

With market traction like this, looking to the near future, Hagedorn states that he plans to invest another $150 million into the sector by the end of 2016, making for a total investment that dwarfs the company’s biggest acquisition to date.

Large-scale entry of names like Scotts Miracle-Gro and Microsoft into the legal marijuana space, along with the sector’s lobbying efforts in Washington DC could accelerate the legalization and unification of the fragmented industry, providing the regulatory stabilization of this new investment class needed for a brewing investment boom.

—

Lynda Kiernan