Scotts Miracle-Gro Caught Between Weed Killers and 'Weed' Growers

The Hagedorns' Bold Bet on Cannabis

A little over a decade ago, Jim Hagedorn, the chief executive of Scotts Miracle-Gro, took a significant risk by venturing into a new line of business. His goal was to revitalize growth for his century-old lawn-and-garden company. What he knew for sure about this venture was that he had to keep Scotts out of the name. He and his son, Chris Hagedorn, who was tasked with leading the new division, didn’t want to scare off investors, bankers, or customers by signaling too loudly that the American icon of lawn fertilizer and potting mix was branching out into cannabis.

At the time, Wall Street had little appetite for anything related to cannabis, and cannabis growers were equally hesitant to associate with a corporate brand like Scotts. Even a mention of cannabis from Jim in a 2011 interview with The Wall Street Journal prompted an outcry from board members. To avoid such issues, the Hagedorns translated their surname from German to English and named the new subsidiary Hawthorne Gardening Company.

“We didn’t want to mislead our consumers about who we were; Hawthorne always belonged to Scotts,” Chris Hagedorn said. “But if you’re not going to put the effort in to look below that layer, that was fine with us too.”

For much of the decade following Hawthorne’s formation in 2014, the bet looked like a winner. Most states either legalized or at least decriminalized recreational marijuana use, opening the way for a nascent industry that inched past $31 billion in sales last year and is forecast to come close to $33 billion this year, according to the cannabis data firm BDSA.

Yet few public companies have joined the so-called Green Rush, in part because of regulatory barriers. Cannabis growers and distributors face banking roadblocks, and companies can list only on foreign exchanges and over-the-counter markets.

Despite the obstacles, the Hagedorns believed that Hawthorne—and by extension Scotts—could be a corporate trailblazer in the cannabis industry, albeit at arm’s-length, by supplying materials and equipment.

“This was legal,” Jim Hagedorn said. “We’re not in the pot business.”

Scotts spent about $2 billion in the years that followed to make Hawthorne the dominant supplier to cannabis cultivators. The division grew through acquisitions and, for a while, boosted Scotts’ profits and stock price to new highs. After topping out at about $125 just before the pandemic, shares soared to a peak of over $250 in the spring of 2021, according to FactSet.

“When things started to surge in the pandemic and the stock went above $200, they looked like geniuses,” Truist analyst Bill Chappell said.

A Family Legacy and Strategic Moves

Jim Hagedorn, an Air Force veteran known for his direct boardroom language, had a record of growing what began as a family-run business. He helped his father, Miracle-Gro co-founder Horace Hagedorn, orchestrate the former Long Island, N.Y.-based plant-food maker’s 1995 merger with Scotts. The deal made the family the largest shareholders of the combined company. Jim, who became CEO in 2001, oversaw the company’s consolidation of the lawn-and-garden industry in the 1990s and 2000s, acquiring major brands and product lines.

Growth slipped in the early 2010s. Consumers spent less on lawns and gardens in the aftermath of the 2007-09 recession, and the company’s three largest retailers—Home Depot, Lowe’s and Walmart—slowed the opening of new stores, stunting growth for Scotts products. The company’s reliable consumer business mostly grew at an annual rate in the low single-digits, and the board clamored for more growth.

Around that time, cannabis was seen as an untapped market, offering a significant upside for anyone willing to supply its growers, according to David Aronowitz, a former Scotts executive who led Hawthorne’s dealmaking during its early years.

“Jim was looking for an opportunity,” said Aronowitz, now general counsel for Athena Ag, a nutrient supplier to the cannabis industry.

To lead Hawthorne, Jim enlisted his eldest son. Chris Hagedorn, then a 29-year-old Brooklynite, had resisted joining the family business. When Chris finally came on board, he worked on a team that tended small businesses that Scotts acquired and helped scale up their operations.

“We could, for relatively small amounts of money, invest in a business that would bring our overall corporate growth rate up,” Chris Hagedorn said. He was exercising the kind of skills needed for the build-out his father envisioned for Hawthorne.

Expanding the Reach of Hawthorne

At the onset, Hawthorne cast its business as selling products for hydroponics, a soil-free method of growing plants, that can be used by urban gardeners. They were also used for growing cannabis.

Demand turned out even stronger than the Hagedorns had imagined. Chris learned that small nutrient businesses serving hydroponic growers were pulling as much as $70 million a year.

“We had this dawning realization that there’s this huge market out there that we’re not aware of,” Chris said. “The more we dug into it, the more excited we got.”

Cannabis cultivation suppliers were skeptical of Hawthorne’s entry into the market.

“We were, as a culture, pretty anti-corporate and anti-mainstream,” said Ross Haley, CEO of the cannabis company Truth Enterprises. Haley helmed two cannabis-industry supply companies, Vermicrop and General Hydroponics, until they became Hawthorne’s first big acquisitions in 2015.

“We were very concerned about what it would look like if we joined forces with a corporate company,” Haley said.

Chris and his team were sympathetic. Any company worth targeting had taken a risk, legally and financially. “What do you say back to that?” Chris said. “I’m a rich kid from Long Island. I wasn’t out there on the front lines.”

To earn the trust of potential acquisition targets, the Hawthorne team honed their pitch: We’re not corporate raiders, and we have no intention of cleaning house.

“We wanted to keep all the real weed people, all the real industry people, because that’s not us,” Chris said. “We’re not going to come in here and tell you how to run a cannabis business.”

Hawthorne billed itself as a toolbox for operations needing capital or R&D, he said.

Vermicrop and General Hydroponics were at the time the industry’s heavy hitters in cultivation supplies. Haley said that for all their hesitation about teaming with a billion-dollar public company, he and Larry Brooke, who founded General Hydroponics in the 1970s, felt Hawthorne could help the marijuana industry reach a new legitimacy. In turn, they could help Hawthorne establish a reliable reputation in the cannabis industry.

“The Hagedorns knew they needed to buy credibility,” Haley said.

Deal negotiations took more than a year. At the 11th hour, Haley recalled, he and Brooke received a letter from Scotts’ human resources department saying Vermicrop and General Hydroponics would have to drug-test employees.

“We’re a cannabis company, and you’re going to tell a bunch of scared employees, hundreds, that they’re going to have to pee-test?” Haley said. “We decided to tell them we weren’t going to do the deal.”

Scotts backed down, eliminating marijuana drug-testing for all employees companywide.

The Rise and Fall of the Cannabis Venture

Hawthorne expanded its product line to such cultivation infrastructure as lights and water filtration systems. With each new acquisition, Hawthorne grew closer to a one-stop supplier. “Other than the walls, I would say probably 80% of what I had in my garden was from Hawthorne,” said Matthew Walklet, a grower in Michigan in the 2010s and now at the cannabis-nutrient company Advanced Nutrients.

As more states legalized marijuana use, Scotts talked more openly about the nature of Hawthorne’s business. Investors in turn embraced the company’s stock as a way to invest in the cannabis industry without buying shares in a pot-growing company.

“There were a lot of people who bought the stock for Hawthorne,” Raymond James analyst Joe Altobello said. “They thought, ‘I don’t have to pay 100-times revenue for a business that’s losing money, and I have this core lawn and garden business.’ For a while there, it was a stealth way to play the cannabis space.”

Once the pandemic hit, marijuana consumption grew along with investment in the cannabis industry, including Scotts. The company’s market capitalization more than doubled from March 2020 and to early April 2021. Scotts even formed a new subsidiary, The Hawthorne Collective, through which it could make its own minority investments in the legal cannabis industry.

Wall Street attributed much of Scott’s rising share price to Hawthorne Gardening. For a while, it looked as though Chris had built a more valuable business than the one his father led. Chris started to wonder if he might one day step into his father’s shoes as Scotts’ chief executive.

“When the stock is ripping, all you do is look at the stock and say, ‘I am so good, I am a genius,’” Chris said.

The Downfall of the Cannabis Venture

The high didn’t last. Skyrocketing demand during the pandemic spurred the industry to increase production capacity. When sales fell back to earth in 2022, growers were left with a lot of unsmoked inventory. Wholesale prices tumbled, and Hawthorne customers went bust.

“One market after another, starting with established markets out in the West, found that they had created so much capacity by granting so many licenses for cultivation that it warped the amount that they could fill in their own state,” said Frank Colombo, managing director for cannabis investment bank Viridian Capital Advisors. “It ended up crushing pricing.”

At Hawthorne—a beneficiary of industry expansion—revenue slumped and losses mounted. Scotts’ golden goose became an albatross. “If you’re going to sit here when the stock is good and tell yourself you’re a genius, what do you do when it goes down?” Chris said.

Cannabis is still classified as a schedule 1 drug by the Drug Enforcement Administration, a designation shared by heroin. Crucially, businesses that touch the cannabis plant aren’t allowed to deduct ordinary business expenses on their taxes, leaving razor-thin margins.

“What was once a promising high-risk, high-return industry has now morphed into a high-risk, low-return industry,” said Beau Whitney, an economist who advises cannabis firms and investors. “The current regulatory environment is driving people back into the illicit market.”

Jim attended a dinner at Mar-a-Lago with Trump in April, hoping to persuade the president to end the federal government’s hostility to legal cannabis. He made his pitch to Susie Wiles, the White House chief of staff, saying the president should soften federal restrictions on cannabis.

A bill that would give state-approved cannabis operations access to banking services has repeatedly failed in Congress.

A Biden administration push to reschedule cannabis to a less-restrictive drug category is stalled. Trump has voiced support for the idea and said this month he expected a decision about it in coming weeks. That would be a good start, according to Jim. “It solves the tax issue, which allows these businesses to actually make money,” he said. “Without that, all you’re going to have is illicit operators.”

Until Washington gives the green light, the Hagedorns said, it is time to disentangle the Scotts from marijuana. The company transferred Hawthorne Collective to an undisclosed partner earlier this year and is in negotiations to sell Hawthorne Gardening by years-end. The Hagedorns want the sale to include an option for Scotts to buy back Hawthorne if the federal government legalizes cannabis.

“Anybody who has gone legal has busted,” Jim said. “Everybody who provided capital has been burned. There’s nobody left and everyone is running out of money.”