Scotts Miracle-Gro – 2021 Strategic Update – 14 May
2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Brendan Hodge (BH)
Former Director, Pricing Analytics at Scotts Miracle-Gro Co
Agenda:
1. Scotts Miracle-Gro's (NYSE: SMG) lawn and garden portfolio
2. Bricks-and-mortar retailer trends
3. Hawthorne segment growth – drivers and sustainability
4. Roundup marketing agreement dynamics
Contents
Q: Could you give an overview of the lawn and garden industry, including some of the main drivers and top
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competitors?
Q: What were 2-3 trends you noticed pre-coronavirus and how were they impacted or altered by the pandemic?
3
Q: Could Scotts Miracle-Gro operating in so many different categories increase supply chain issues? Do you
4
think the company is better off focusing on one segment and scaling it?
Q: How do you think retailers will react to Scotts implementing mid-single-digit price increases in Q4 2021 4
Q: Could you elaborate on how the retailer-supplier relationship has evolved, especially given how competitive
5
private label has become?
Q: How do you think Scotts assesses e-commerce and its impact on the lawn and garden market exiting the
5
pandemic?
Q: Could you explain Scotts’ strategic rationale for marketing and distributing Monsanto’s Roundup, given
5
the controversy and pending litigation around this product
Q: Do you predict any reputational risk to Scotts from continuing its agreement with Monsanto
6
Q: Do you think the strong demand in lawn and garden will continue post-coronavirus, given the macro factors
6
you mentioned?
Q: How do you think Scotts will address the shortage of a few raw materials in North America
Q: How could Scotts capitalise on the current demand environment to create future stickiness?
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7
Q: You mentioned that Scotts is the leading player in almost all lawn and garden categories. How do you think
7
the company has maintained that brand strength and depth?
Q: Could you speak to inflationary pressures Scotts is experiencing, given supply shortages?
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Q: What was your experience at Scotts around the company’s willingness to cut prices to gain market share?
8
Could you explain that strategy’s success and how it’s evolved?
Q: Could you elaborate on private label? Do you predict this will be a significant threat to Scotts and the
8
industry?
Q: How might this breakdown between private label and branded products alter due to a higher
unemployment rate and the fact that customers are dealing with their own financial pressures, given that the
industry and Scotts has benefitted from the pandemic? How does the company assess consumers who aren’t
9
doing as well?
Q: How do you think Scotts assesses market share? Could there be any risk to the company’s dominant market
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position?
Q: What’s your overview of how Hawthorne Gardening fits into Scotts’ portfolio and the key categories within
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this division?
Q: What are your thoughts on growth prospects in the hydroponics and indoor gardening segment for
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marijuana, given regulatory environment changes?
Q: How do you think Scotts considers innovation within Hawthorne and opportunities to service large
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agricultural players if marijuana were deregulated at a faster pace?
Q: Are there any clear synergies between Hawthorne and Scotts’ lawn and garden group?
Q: How would you assess the competitive landscape for Hawthorne?
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Q: You mentioned Scotts has been rather aggressive in acquiring different brands. What do you think the
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outgoing appetite for deal activity is within Hawthorne?
Q: When considering Scotts’ portfolio, what are your thoughts on sustainability issues, the rise of
organisations taking a strong stance on environmental issues and the harmful nature of some of the chemicals
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Scotts is still known for?
Q: How would you assess Scotts’ ability to innovate vs buying a large number of companies, based on its
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portfolio and ability to expand into adjacent categories?
Q: How do you assess the growth prospects for different bricks-and-mortar retailers? Home Depot is projected
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to grow at 3% while Lowe’s is expected to be down 3% in 2021
Q: What’s your outlook and your best- and worst-case scenarios for Scotts over the next 6-12 months?
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Q: Is there anything you think the investor community should know about Scotts’ management team and its
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ability to execute on priorities, or anything you think is commonly overlooked?
Scotts Miracle-Gro – 2021 Strategic Update
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Scotts Miracle-Gro – 2021 Strategic Update. I’m
Nyree Hinton, and I will be facilitating today’s Interview with Mr Brendan Hodge, former Director of Pricing
Analytics at Scotts Miracle-Gro.
Brendan, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
BH: I agree.
NH: Could you give an overview of your background and various roles that you’ve held in the industry?
BH: My background is in pricing. I’ve been doing pricing for a little bit over 15 years now. I got my start in
pricing while working at the Dell Computer Company where I priced software and peripherals and enterprise
hardware. Then I went to Wendy’s and did menu pricing there for several years, and then I spent seven years
at Scotts Miracle-Gro as their Director of Pricing Analytics, doing pricing for all of the consumer product lines.
[00:01:13]
Q: Could you give an overview of the lawn and garden industry, including some of the main drivers and top
competitors?
BH: The lawn and garden industry as Scotts deals with it is divided into three large groups, lawns, gardens
and controls. Controls deals with both weed control and pest control. The gardens area deals with plant food
and with growing media, growing media includes both soil, garden soil and potting soil and also mulch, which
is a ground cover. Then the lawns section deals with lawn fertiliser and with grass seed and grass patching
products. Scotts is the largest player in nearly every category that it plays in, the only exception to that is in
some of the pest control categories, but across garden and lawns, Scotts is the largest share in each of its
categories that it plays in. It does have key competitors. In the gardens area, when you look at soil, the main
competitors are local and private-label products and then also some higher-end organic products. There’s also
a regional player, Kellogg, which is a lower-price-point organic product. As you look at plant food, again, it’s
primarily private label and there is also Preen. When you get into controls, there are actually quite a few.
You’ve got Spectracide, you’ve got Bayer, Raid, Off, a number of players there in that controls space. In the
lawn fertiliser space, again, private label is pretty big, Lowe’s, Home Depot and Walmart each have their own
private-label lawn fertiliser. There are also a couple of independent products, the main one that I can think of
on their radar would be Milorganite. Then, in the grass seed area, Scotts has a moderately significant
competitor which is stronger in the south called Pennington, which is another grass seed company.
[00:03:33]
Q: What were 2-3 trends you noticed pre-coronavirus and how were they impacted or altered by the
pandemic?
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BH: The biggest challenge that the lawn and garden space has faced is that it has had over the last couple of
decades an ageing demographic. People who are over 40 garden more than people who are under 40 and, in
particular, as we often hear about in media stories, millennials have been slow to settle down and get their
own houses and, really, gardening is, in general, a homeowner’s kind of space. There’s a little bit of work in
terms of indoor gardening and hydroponics, urban gardening, but most of the core lawn and garden space is a
homeowner space. A lot of the issue that Scotts has seen is that while their share remains strong, the number
of people participating in the category has been shrinking over time, and in this regard, COVID represented an
inflection point in one of the biggest ways that we’ve seen in recent years. There was a smaller inflection point
back in 2008 with the recession where we saw a lot of people who were cancelling vacations, staying home,
cutting costs. One of the things that you can think of in terms of marketing is that gardening is one of those
things that people aspire to do, so in a sense, the biggest competition for gardening is not some other company
but it’s actually other ways of spending your time, so it’s Disney World, it’s Netflix, it’s other things that you
could be doing instead of gardening. With the pandemic, where everyone really had to stay home, the lawn
and garden space saw a much bigger effect, like in 2008. In 2008, it was a pretty good year for lawn and
garden, with COVID, 2020 was an outstanding year for lawn and garden because people were staying home
and they were also looking for things that were healthy and outdoor and away from other people to do and
gardening is definitely one of those things.
[00:05:49]
Q: Could Scotts Miracle-Gro operating in so many different categories increase supply chain issues? Do you
think the company is better off focusing on one segment and scaling it?
BH: Scotts has historically grown through moving into adjacencies. If you look at how the current Scotts
Miracle-Gro company came together, you had two brands, Miracle-Gro plant food and Scotts fertiliser, which
joined back 30 years ago, and then additional brands that have been added to that, either through acquisition
or through product development. So, because Scotts is the largest share player in the number of categories that
it’s in, they’ve found that one of the best ways to grow is by nurturing those adjacencies so that they can have
more and more things where it’s related to things that people would perceive Scotts positively on and so they
can leverage their brand strength to move into other related areas. I’m not aware that there have been issues
with dealing with that breadth of product. Really, what this is is this is a series of markets in which Scotts is
fairly dominant and so, given, like I said, the issue that there’s a limited demographic of people who are deeply
into gardening, the way that you continue to grow as a company is you continue looking for new adjacencies as
well as looking to continue to dominate in share in the categories you’re already in.
[00:07:37]
Q: How do you think retailers will react to Scotts implementing mid-single-digit price increases in Q4 2021?
Do you think the company will be able to largely pass on costs?
BH: Historically, when looking to take large price increases like this, Scotts has been pretty successful in
passing those price increases through to retail. If you look at how those retail prices have adjusted over the
years, a number of these products are now significantly more expensive than they were, say, 10 years ago. In
that sense, retailers, although they don’t like price increases, at a subjective level, they prefer a price increase
which is large enough that there will be a clear MSRP adjustment and everyone will have to adjust. One of the
things that can frustrate retailers in a consumer product like this is where you have a 1% or 2% price increase
and so more value-focused retailers like, say, a Walmart can decide to simply absorb the price increase and not
pass it on, which then makes it hard for everyone to move up. There is, certainly, history for getting prices to
move up like this, and given the heightened demand, it probably seems like a pretty good time to do it, given
the cost environment that the company is facing.
Private and confidential 4
[00:09:04]
Q: Could you elaborate on how the retailer-supplier relationship has evolved, especially given how competitive
private label has become?
BH: If you look back over the long time frame, the 20-25 year time frame, Scotts developed a very close
relationship with Walmart, Home Depot and Lowe’s early on in the big-box expansion, and so Scotts was able
to ride the growth of that big-box retail industry to increasing share dominance. It provided two things, one is
it gave the retailers brands that everyone wanted and that allowed Scotts to leverage its strength in marketing
to a broad audience, it also allowed them to simplify the number of accounts that they needed to closely
manage because if you think about pre-big box, you had lots more local stores and local chains that were doing
this work. In that sense, Scotts has historically a very strong relationship with these big-box retailers.
However, the big-box retailers also would love to continue to grow their private label business. They make
significantly higher margins on private label than they do on Scotts. With Scotts’ brand strength, the challenge
here for the retailers is that the most dedicated gardeners tend to be those who are most attached to Scotts and
it’s the more marginal gardeners who are more willing to try private label. Your challenge there is that when
you go into periods where fewer people are gardening, the people who will first exit the category are often
those private labels and so you’ll actually see Scotts’ share increasing during periods when the category is
gradually falling off.
[00:11:05]
Q: How do you think Scotts assesses e-commerce and its impact on the lawn and garden market exiting the
pandemic?
BH: E-commerce clearly is an important area going forward and it’s something that Scotts and the retailers
have paid a lot of attention to. One of the challenges with the lawn and garden category is it features a lot of
products which have a very high weight-to-price ratio. Basically, a lawn and garden product is heavy for the
dollars involved. If you think about a standard bag of lawn fertiliser, it might cost USD 22-24 and it might
weigh 20 pounds, so in terms of dollars per pound, it’s a very difficult value to deliver to people, shipping a
USD 20 product is expensive. In the lawn and garden space, two things to be aware of are number one, and
Amazon has not grabbed nearly the market share that it has in other areas, like if you think about books,
clothing, more infrequent purchases that are lighter. Another important thing to keep in mind is that in the
lawn and garden space, often, e-commerce is not pure e-commerce where it arrives on your doorstep in a box
but rather click-and-collect where the customer places an order, it’s pulled off the shelf and they come and
drive through and have it dropped in their trunk. That continues to use the retailers and it continues to use the
retailer distribution channel but now it’s enabling a customer to purchase online, which can be more impulsive
and, during COVID, lower contact, so for a Home Depot or a Lowe’s, just like for grocery, you have the
opportunity with COVID for people to get used to doing click-and-collect kind of behaviour rather than just
browsing the store.
[00:13:14]
Q: Could you explain Scotts’ strategic rationale for marketing and distributing Monsanto’s Roundup, given the
controversy and pending litigation around this product?
BH: The Roundup relationship goes back a number of years. Scotts has been the exclusive consumer
distributor for Roundup, whereas Monsanto sells Roundup directly to farmers and also to larger
organisations, like businesses, landscaping services, the Park Service, etc. Scotts manages the consumer space
for Roundup and, actually, using concentrate from Monsanto they have actually run Roundup through their
bottling line, do the package design and then sell it to customers, so there’s a collaborative relationship
between Monsanto and Scotts. That’s a relationship which Scotts has sought to deepen for years because
Roundup is a very, very strong brand and it was recognised as the premier name in weedkiller that really
Private and confidential 5
worked. There’s always this trade-off in controls between the desire consumer have to have more of an organic
and friendly product and having a product that they are really, really sure is going to kill whatever it is that
they’re dealing with, and Roundup had a strong reputation for killing what they were dealing with. If you look
back at the announcements that were made by Scotts about the deepening Monsanto relationship and their
expectations in terms of growing the space and the ability to have more Roundup-branded, Scotts-developed
consumer products. Some of which do not even use the glyphosate active ingredient because they’re selective
weedkillers and so they’re not using the key ingredient in commercial Roundup, which is a full-spectrum
weedkiller, they’re using various selective weedkillers. That agreement was reached shortly before the big
blow-up in cancer lawsuits. Monsanto’s position is that the cancer lawsuits are not actually supported by the
science and so they continue to maintain that the products are fine but it became a much more radioactive
topic in consumer minds right around that time so that became a challenge in terms of what would otherwise
seem like a really strong branding opportunity was fully licensed right as the brand became less attractive to
some consumers.
[00:15:52]
Q: Do you predict any reputational risk to Scotts from continuing its agreement with Monsanto?
BH: I think that there is potential for that risk. I think the trade-off there is that it is probably more localised
in consumer mind to the brand name so I would see the bigger risk as being that when Scotts entered into that
agreement, their expectation was that they could develop a whole range of different products, from weedkillers
to insect killers to maybe even mulch that might or might not have an active ingredient in it but mulch
naturally prevents weeds from coming up. Their desire was to really leverage the brand recognition of
Roundup as being something that effectively prevents something that you don’t want, and that probably
became less valuable as a result of the changing brand image of Roundup. I think that’s a financial issue for
Scotts but I don’t think that it leaches over to the completely separate brand names of Miracle-Gro or Scotts,
etc.
[00:17:11]
Q: Do you think the strong demand in lawn and garden will continue post-coronavirus, given the macro
factors you mentioned?
BH: My thought there would be that there are going to be two dynamics that are going to play out here. One is
that gardening just when you look at consumer taste is something that people do value in their lives, and so
when people have the experience of doing gardening and they have the good results of growing something and
having the plant do well, whether it’s getting their lawn to look better or doing decorative flowers or doing
vegetables that they can eat, people do value the effect of that on their lives. One of the biggest predictors of
whether people will continue gardening is whether they’ve done it in the first place, so there is stickiness to
that consumer experience, but we do also find that as consumers get more busy, it’s one of the things that they
sometimes give up. I think that we will see, as people have other options, as their sports schedules, vacation
schedules, school schedules, work schedules get busier, they’re probably going to be spending somewhat less
time in the yard. Probably we’ll see something like the historical pattern that we saw after 2008 where there
was historically high consumer demand when people were home more and doing more home-based activities,
but then as they got busier and they had the money to spend on bigger ticket experiences and events, there was
some fall-off in their usage. I think that this year we may continue much like last year but with some
predictability, so probably even more supply chain support for it and so you could probably reproduce last
year’s results again or maybe even do a little better because you won’t run out of product, but in the longer
term, I would imagine there will be some degree of decrease over the coming years.
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[00:19:16]
Q: How do you think Scotts will address the shortage of a few raw materials in North America in the short and
long term?
BH: I think that Scotts will probably continue to both externally source sphagnum peat moss and also
vertically integrate, so continue to actually own peat extraction locations up in Quebec. Then a lot of it is going
to come down to the available freight and stuff like that because the shortage, you have a couple of things that
come into play, one is the overall consumer demand because it’s a limited resource, but another element is
labour up there where it’s being extracted in Canada and also freight from Canada to the US. Right now, all of
those things are constrained. As those constraints come off a bit, some of that is going to get better, but it is
also a natural resource which has a limited supply, which is why you both want to look at formulation
questions, I think something that they might look at would be are there renewable resources, such as wood
pulp, that can be used? Then they’ll also just look at the formula within the bag, that is something that can be
varied to some extent.
[00:20:49]
Q: How could Scotts capitalise on the current demand environment to create future stickiness?
BH: I think that one of the things Scotts will be doing is leveraging their historic strength on marketing and
also the fact that COVID has pushed people online a whole lot more. Although the purchase itself may not be
online, that does allow them to continue to expand the consumer interaction that they’ve been having up to
this point. That would be things like their branded web apps, it would be things like sponsored media content,
so podcasts, resource websites, plant identifiers and then apps which provide consumers with tools, both to
know how to garden and to remind them when they need to do different things. As we get better and better at
GPS and climate zoning and integrating with other data streams, it becomes more and more possible to do
something like tell a consumer, “Hey, cicadas are coming up in your area. Are cicadas dangerous for your
plant? No, they’re not. Here’s what you need to know.” You can really fine-tune that to the experience of a
particular consumer and continue to interact with them in ways that will increase the stickiness.
[00:22:21]
Q: You mentioned that Scotts is the leading player in almost all lawn and garden categories. How do you think
the company has maintained that brand strength and depth?
BH: I think really you’ve got a combination there of just honestly very strong product offerings and then also a
deep commitment to advertising and consumer interaction. Going all the way back to when Horace Hagedorn
was doing infomercials with Miracle-Gro and showing how they would grow plants twice as big, Scotts has
always been deeply committed to a strong advertising and marketing focus, which is laser-focused on getting
the results of their products across to customers. Really, you’re not going to see other players in the space that
advertise as much or in as focused a manner in the category as Scotts does.
[00:23:30]
Q: Could you speak to inflationary pressures Scotts is experiencing, given supply shortages? Can you expand
on the company’s ability to continue passing on price increases consistently?
BH: What we’re seeing right now out there just in the broad economy is a combination of increases on certain
key commodities, some of which are going to hit Scotts. For instance, the oil-related commodities, things like
resin, are going to be going up for them and that’s going to affect their packaging. Corrugate and other
Private and confidential 7
packaging-related costs have also been going up, you can think about the vast amount of corrugate that’s going
into Amazon boxes at the moment, etc. Another key area that’s going to hit them is freight. I mentioned in
relation to e-commerce that lawn and garden products are very heavy. That also relates to your freight expense
and so when you’re moving, say, trucks of growing media around, Scotts has a good network of lots of growing
media sites around the country so that those bags of soil and mulch pallets are not having travelled too far, but
even so, just getting that product to store requires a lot of trucks.
Whether you’re thinking about a temporary thing, like a pipeline disruption, or just the longer-term
constraints on freight overall, and that’s a combination of lack of available drivers, oil costs and then just costs
of maintaining a fleet, freight is a big inflationary pressure on Scotts as well. Freight is one of the things that
we’ve seen going up a lot over the last 3-6 months. Those are things that are going to continue to impact
Scotts’ overall cost structure and the way that they’re going to deal with that is by taking prices up to the
retailers, who will, in turn, be taking retail prices up with the consumer. That’s potentially going to moderate
the demand a little bit because although it is not a very price-elastic category, some people are going to feel
priced out of the market, but it’s also going to just be part of the overall price inflationary environment.
[00:25:59]
Q: What was your experience at Scotts around the company’s willingness to cut prices to gain market share?
Could you explain that strategy’s success and how it’s evolved?
BH: One of the key areas where we did take at least average prices down, we did not take NSRPs down, but if
you look at the average price that the average consumer is going to pay that the price has gone down, it’s in the
growing media area. If you roll back, say, 10 years, the majority of soil and mulch that people were buying was
local-branded soil and mulch. You might buy some basic potting soil, some basic top soil and those would be
in local non-name brand bags that you’d buy at your garden centre and your mulch you might buy from a local
mulch provider, you might buy it at a gas station. If you even bought it at the big-box store, it was probably not
branded. Scotts really pushed into the branded soil area and it created strong branding around Miracle-Gro
garden soil, Miracle-Gro potting soil and the Earthgro mulch. If you look back, say, 8-10 years ago, they
started collaborating with Home Depot and Lowe’s in particular to aggressively promote those bag products.
You would have weekends where garden soil would be five bags for USD 10, where mulch would be five for
USD 10 and the result for consumers out there is that much, much more product got moved. A weekend of five
for USD 10 could be more than 10 times the demand that you would see on a weekend of just MSRP. What
that was doing was taking share away from those lower-grade products and those local brands or non-branded
products and moving it into the branded products. Overall, it did take average prices down, it took profitability
out of the growing media space, but it also made the growing media branded space much, much, much bigger
so there’s now a lot of volume which relies on those couple of key spring weekends when Home Depot and
Lowe’s are doing really aggressive price promotion. That’s an example where a lot of share was brought into
the branded space and a lot of consumer demand was created by taking prices down.
[00:28:48]
Q: Could you elaborate on private label? Do you predict this will be a significant threat to Scotts and the
industry?
BH: No, private label really has been a stable share percentage, stable or maybe very slightly decreasing for
the last decade or more. What that really does is that when you look across consumers, you have a range of
consumer spending preferences. You have some people who are willing to go very premium and so those
people may buy the product at then a big-box store and they may even go to a local independent garden chain
that’s going to have more expensive all-organic products and they’re going to buy boutique, very expensive
products. These are the people who might buy a USD 25 bag of high-end organic potting soil to use for their
plants. Then you’ve got your broad middle of consumers who are going to buy a branded product and that’s
Private and confidential 8
where Scotts and Miracle-Gro do very well. Then you have consumers who are just looking for something that
fills the slot and those guys tend to gravitate towards the private label. That seems like it’s a pretty stable
breakdown between the different types of consumer.
[00:30:21]
Q: How might this breakdown between private label and branded products alter due to a higher
unemployment rate and the fact that customers are dealing with their own financial pressures, given that the
industry and Scotts has benefitted from the pandemic? How does the company assess consumers who aren’t
doing as well?
BH: Potentially, you may see some squeezes there. The risk, obviously, with being the higher-price product is
that when consumers decide that they can’t spend as much, they’ll skimp on the branded product. I think one
of the things that helps insulate Scotts from that a bit is, if you think about it in terms of the overall home
improvement category, working on your garden or your lawn is actually a pretty inexpensive project. So, again,
thinking about that 2008-09 recession example, one of the things that was seen broadly within the overall
Home Depot store is that you see less spending on major appliances, on kitchen upgrades, bathroom
upgrades, the sort of products you would spend more than USD 1,000 on and what they see a growth on is
under USD 100 projects. If you look back I’ll say to 2008, back in 2008, a bag of branded Scotts fertiliser
would have been about USD 15 and today, that same bag of fertiliser would have an MSRP of about USD 24.
Over the last 13 years, there’s been a significant increase in that MSRP. However, if you think about it in terms
of overall home improvement projects, USD 24 is still a fairly low price and so Scotts in lawn and garden tend
to be counter-cyclical and do well in periods of unemployment and more economic distress and not as well
when people are more focused on those big-ticket projects. I can see the risk but I think it will probably be
fairly mild.
[00:32:49]
Q: How do you think Scotts assesses market share? Could there be any risk to the company’s dominant market
position?
BH: The only real risk I would see to their current dominant position, and I think you see this in a lot of the
work Scotts has done in terms of moving into organic to moving into more non-standard areas of the lawn and
garden space is that when you are the market leader in a category, the one thing that you can’t do is run
against the category. The challenge here for Scotts has been that they’re very, very successful at selling plant
foods, soils with plant food in them, fertiliser, grass seed that’s coated with fertiliser and with water-trapping
agents so that the seed will stay moist and will be better at sprouting, all of these things are to some extent
engineered products that have some, what you could call, chemicals in them. For the very organic-focused
consumer, which is often a younger consumer that does not feel comfortable with the idea of putting things
they think of as potentially hazardous chemicals into their garden or into their lawn, it’s very hard for Scotts to
run on an anti-chemical message when they make so much of their money from selling chemically driven
products. The biggest challenge they have had is in getting into that very crunchy, what they would call a deep-
green space, not just an organic product but aggressively anti-chemical, anti-fertiliser deep-green products.
That has been an overall challenge for them. They’ve dealt with that to some extent through acquisition. If you
look within the Hawthorne portfolio, you have some brands which are arguably pretty deep green and so that’s
getting away from the overall Scotts image and that’s why Hawthorne lives as a separate organism within the
Scotts ecosystem. I think that really the longer-term risk for them is if in your younger cohort of consumers
you continue to have this very anti-chemical set of perceptions, that does threaten Scotts’ overall historic
portfolio because they can’t walk away from all of those products they already have.
Private and confidential 9
[00:35:38]
Q: What’s your overview of how Hawthorne Gardening fits into Scotts’ portfolio and the key categories within
this division?
BH: Hawthorne is the hydroponics and indoor gardening portion of the Scotts world. It has a combination of
a few products which are basically traditional lawn and garden products but they are boutique, very organic
products for a consumer who is willing to spend more in order to get very organic products that still work. You
have some Hawthorne products which play in that space. You also have, especially through their distribution
acquisition with Sunlight, you’ve got some just straight-up hydroponics industry products, something like
Gavita lighting is a brand which is in the overall Hawthorne portfolio. Gavita sells lights which are really only
going to be of interest to semi-commercial or very deeply devoted hobbyist growers who are deep into
hydroponics, and most of those are people who are growing marijuana. There’s a split within Hawthorn
between a smaller portfolio of products which are more broadly for the deeply organic consumer and then a
number of products which are focused on people who are using hydroponics to do high-value agriculture,
which is primarily marijuana.
[00:37:27]
Q: What are your thoughts on growth prospects in the hydroponics and indoor gardening segment for
marijuana, given regulatory environment changes?
BH: Obviously, the company aspiration for that and expectation is that that will be an area that’s going to
grow quite a bit as more states continue to legalise marijuana and as it becomes more mainstream for people
to be involved in the marijuana industry. There’s clearly an expectation there. I think the challenge is that if
you get too deregulated too fast, if you imagine a world in which we have federal deregulation of marijuana
and it’s not illegal at all. Currently, the marijuana industry has a lot of semi-professional, semi-hobbyist
growers and those are the sorts of people who go to hydro shops and buy the kind of products that Hawthorne
currently sells. I mentioned Gavita lighting, that’s a light that you would use in a small greenhouse where
you’re growing marijuana, that’s more than just a college student with a closet but it is still a fairly small-scale
operation. If you move into a world where you have a big ag or a big pharma approach to growing marijuana
on a fully legal but heavily regulated industry, maybe almost like the tobacco industry is now, then potentially
you have big shifts. Probably, they still stay connected with, say, the lighting, but it becomes a lot more
difficult with some of the things like the nutrients because the nutrients are often a lot more hobby-focused
and a lot more culturally connected. Some of those products would become an issue if they had full
deregulation.
[00:39:34]
Q: How do you think Scotts considers innovation within Hawthorne and opportunities to service large
agricultural players if marijuana were deregulated at a faster pace?
BH: I think they’re continuing to track both the legal progress, they’re watching how things have gone in big
states like California and Washington and they’ve also got some involvement up in Canada where you have
national legalisation. They’re tracking how things are going there and trying to see how things will develop.
They are definitely committed to having the right products to deal with things as they go forward. They will
potentially have to sort out things like how their distribution channel works. Right now, the distribution
channel is really defined by the legal environment where Hawthorne would sell to a hydro shop, which is a
legal business, in that they’re not selling any actual marijuana products, they’re selling supplies that you, in
theory, could use to grow marijuana. From a federal point of view, the hydro shop is a legal business but their
customers are not legal businesses and so that’s pushing the risk out one layer to where the hydro shop is
taking on the risk of dealing with the customers that are working in a cash-only environment and are
potentially breaking federal law. That whole distribution environment is defined by the federal statutes. If that
Private and confidential 10
changes, that distribution environment changes, but I think that there’s definitely executive commitment to
remaining nimble and having the right set of products and so they would do their best to figure that out as
things evolve. I guess one of the big questions there is just what truly happens to that sort of industry as you go
through a legalisation? If you think about a semi-controlled substance like, say, alcohol, there’s a huge market
for home-brew supplies but the market for actual commercially brewed alcohol is so, so much bigger and so
you have to decide where you’re going to play, and I’m assuming that they would go after the biggest market
because Scotts is just always very aggressive about size.
[00:42:05]
Q: Are there any clear synergies between Hawthorne and Scotts’ lawn and garden group?
BH: I think the two clear synergies would be, number one, like I mentioned, you have these deep-green
products and there is some overlap there between people who are very committed to organics and people who
are connected with the marijuana culture. I think the other thing, which is sort of a technological connection,
is although we have seen trends during the last couple of years of more millennials moving out from urban
areas and getting houses, we’ve seen people spending more on their houses as they’ve been locked down
during the pandemic, there is still an overall trend towards urbanisation. People who are living in city centres
living in smaller environments but who still want to have a connection with growing things and with nature.
One of the things that Scotts has worked hard on over the years is connecting with urban and young
consumers and helping them see ways in which they can still have a little piece of nature in their apartment,
on their rooftop, in their window box, ways that they can still grow. Some of the technology there is going to
overlap. Obviously, you’re not buying an industrial lighting apparatus at that point, but they do have through
their b product line, they’ve got a truly consumer-focused set of indoor growing products which is not
applicable to marijuana at all, it’s for growing flowers and tomatoes and things like that, so they’ve got some
overlap there already. I think there’s an expectation that they will continue to see increased opportunities for
indoor growing and so there is some overlap there in terms of technology and products.
[00:43:58]
Q: How would you assess the competitive landscape for Hawthorne?
BH: Obviously, it’s a harder environment to track but within the existing hydroponics and marijuana-growing
supplies space, Hawthorn does have a lot of the strongest brands. They have intentionally gone out there,
they’ve done their acquisitions and gone after some of the strongest brands that they can get hold of. In a lot of
cases, they’ll have the high-end product and then they’ll be competing against, say, an imported-from-China
competitor or what you can think of as being almost like a private-label competitor. I guess private label is a
little bit of a weird term because often it will be the distributor which is then having the label but what it is is a
China-sourced product that they have put a brand on and then it’s being sold through one of these other
distributors in the hydroponics space. In that sense, Hawthorne has a very strong set of brands and they’re in a
pretty strong position vs their competitors. In that other sense of what happens if you get into a fully legalised
environment, then you could get into a position where even how you would position as a brand would start to
become different because right now, the big agricultural companies like, say, a Monsanto, are not operating in
the marijuana space and there’s not really a desire to work with people like that. If you got into a space of huge
legal grows which was more like the way that tobacco is grown, it might well be that you would have the big
agricultural companies servicing that and they might have a strong connection just because they’ve dealt with
big growers in the agricultural space before, and that’s something that Hawthorne does not have a history on
so they would be scrambling at that point to figure out how to reposition.
Private and confidential 11
[00:46:04]
Q: You mentioned Scotts has been rather aggressive in acquiring different brands. What do you think the
outgoing appetite for deal activity is within Hawthorne?
BH: I think Hawthorne will continue to be a focus for acquisitions. If you look within the consumer lawn and
garden space, Scotts really does have a lot of the top things but Hawthorne is operating in a much more
dynamic environment so I think you would definitely expect to see, as the environment changes, as
opportunities become available, I think you would expect to see acquisitions more in the Hawthorne space
than the consumer space.
[00:46:59]
Q: When considering Scotts’ portfolio, what are your thoughts on sustainability issues, the rise of
organisations taking a strong stance on environmental issues and the harmful nature of some of the chemicals
Scotts is still known for?
BH: I think that Scotts has always tried very hard to position itself as a company which is responsible and
sustainable in their approach to what they do. What they do is, in some cases, using fertilisers and controls
which some people would see as more risky. I think one of the things that they have tried to focus on in their
consumer education is that in a lot of cases they are the least risky of the things out there. For instance, if you
look at the technology in a lawn fertiliser, lawn fertilisers use slow-release nitrogen, that’s good for a lawn
because it means that the nitrogen is released into the soil over a period of several weeks and so you avoid the
risk of nitrogen burn which, if you buy a really cheap lawn fertiliser and it dumps all the nitrogen content on
the grass at one, if you’ve over-applied, you can end up killing the grass. With slow-release nitrogen, you could
in theory still create nitrogen burn but you’d have to dump a pile of the fertiliser on the lawn. In general, it’s
going to behave pretty well. In that sense, the nitrogen in lawn fertiliser is actually a much more
environmentally safe product than the nitrogen which is in a lot of fertilisers used in commercial agriculture.
If you think about things like the algae bloom down in the Gulf of Mexico, that’s a result of run-off primarily
from agriculture, maybe second source from golf courses, which tend to also very heavily fertilise and use
cheaper fast-release nitrogen, and then the Scotts products tend to be slower release, etc. They’ve tried to
emphasise that both through consumer education and then also through collaboration with key local players.
For instance, down in Florida, where there are some specific concerns about release of fertiliser into the
Florida waterways and damage that would be going on in a micro-environment down there in the Florida
Keys, they have created a Florida-specific product which addresses some of those local concerns and they’ve
partnered closely with local environmental groups that are willing to work with them in trying to get that
message across. I think they’re continuing to try to get that message out here but there is a limit in that they
are still selling products which if you just have an absolute opposition to fertiliser or weedkiller or what have
you, people are simply not going to be comfortable with. They’re working on the sustainability, it is a value of
theirs as a company but there are limits to how far that can go with their product portfolio.
[00:50:36]
Q: How would you assess Scotts’ ability to innovate vs buying a large number of companies, based on its
portfolio and ability to expand into adjacent categories?
BH: I think that there are key examples about. I can think of two clear examples of true internal innovation,
I’ll cover the big one first, that’s from about 20 years ago. 20 years ago, there basically was not branded plant-
food-added potting soil or garden soil out there, potting soil was basically just sphagnum peat moss with some
soil stirred in, it was a pretty cheap product, you could maybe buy it at a Walmart or a lawn and garden store
but it was not branded, it was not advertised and it was pretty basic. Garden soil as well, usually you would get
top soil and maybe you would get some compost to mix into that for organic material. That’s an area where
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Scotts came up with formulas, they came up with input and so they came up with a set of soils for different
purposes, for in-ground use and for potting use, speciality things for things like orchids, they got the right
charges of plant food in there for those different applications and sourced things like the sphagnum peat moss
and the coir to go into that. They created what is now one of their biggest categories, the growing media
category, pretty much from scratch. There was not branded growing media before and they created that space.
That’s a big example. A medium example would be when they launched their EZ Seed product, that’s a product
which has, instead of just grass seed which you have to scatter and then you have to put soil on top of it and
you’ll put straw on top of that and you water it every day and your success rate is low because the seed is in
danger of drying out if you can’t keep it moist enough if it gets too hot.
The EZ Seed product they created has a soil-like product, it’s made from coconut shells, it’s called coir, it
absorbs and retains a whole lot of moisture, way more moisture than soil normally does and so it can sustain
itself through the day and so long as you’re watering it every day or two, it can grow seed on almost any
surface. They would do demos in stores where they would grow seed on bricks and get a decent structure there
growing just in that half-inch of EZ Seed on top of bricks. Those are both examples where they came up with a
new product which didn’t exist before and, in some cases, would start to fit into overall things because younger
consumers are often more comfortable with getting quality dirt or with putting down seed than they are with,
say, putting down fertiliser or with buying straight plant food. Those are both new areas, but then you also see
a lot of acquisition in terms of, what, they acquired Tomcat rodent brand, if you go back further, Ortho was an
acquisition, the Hawthorne areas are a lot of acquisition. It’s a mix and it’s only every so often that you have
those real breakthrough innovations that get you a whole new product area where there simply wasn’t one
before.
[00:54:20]
Q: How do you assess the growth prospects for different bricks-and-mortar retailers? Home Depot is
projected to grow at 3% while Lowe’s is expected to be down 3% in 2021.
BH: If you look at the overall growth of the big-box home and garden centres, Home Depot and Lowe’s, they
have not really been adding a lot of locations in the last 10 years. There are a few new builds, there are a few
that they’ve been taking down, they basically balance out. Those guys are basically fighting a consumer share
war long term, they’re not putting down a whole lot more locations. You do have some other chains which are
still filling out space, Ace Hardware and True Value and so on, they’re doing best, those smaller places that can
fit into neighbourhoods that wouldn’t support a Home Depot or a Lowe’s, are going in there and doing the
chain thing in areas that wouldn’t support a big-box store. Then Tractor Supply is moving into more rural
areas that, again, might not support a whole big-box store but will support a chain store of the right speciality.
I think what you’re seeing with Home Depot and Lowe’s is that you have a basically stable environment,
they’re not adding many locations and what you’re seeing are long-term share struggles between those two in
order to position themselves with customers. Each one has different strengths, Lowe’s tends to bias more
female in terms of their consumer base, Home Depot gets more contractors that are buying there and a bit
more of a male consumer base, so there are different biases but overall, it’s a basically stable environment.
Then the actual growth for different chains is in spaces where Home Depot and Lowe’s are not set up to build
stores.
[00:56:30]
Q: What’s your outlook and your best- and worst-case scenarios for Scotts over the next 6-12 months?
BH: I would say best-case scenario for Scotts Miracle-Gro over the next year would be people are still staying
home enough and focused enough on doing things for their homes but they’re not wanting to make big
investments like additions and major appliances and also the same things that are hitting Scotts’ costs a bit are
often hitting other home improvement projects even harder. The sky-rocketing price of lumber, the scarcity of
appliances, those things will tend to keep people who want to do things to make their homes more pleasant
Private and confidential 13
focused on lawn and garden, and if they’re also not doing quite as much vacation travelling, that will help too.
I think best-case scenario is that Scotts is able to get all of the raw inputs they need, they’re able to get enough
freight to move their products around the country and the overall environment keeps people focused on home
improvement projects but not other things that draw them away from lawn and garden. That could make it
maybe their best year yet in that last year was pretty great but there were some supply issues, if this year
they’re able to have that same push but no supply issues, that could really knock it out. Worst is probably
either people get out and about so much that they’re just not gardening anymore. There’s always some degree
of risk with the weather, if you have a really bad, really wet or really hot season in key parts of the country, you
can hurt yourself a bit with weather, though that tends to cancel out with other parts of the country. Also, just
if stuff starts getting really crazy with the economy so that people are either nervous to spend anything or
prices are just out of control then you could have some issues there. Overall, I would be pretty optimistic
myself about Scotts over the next 6-12 months. I think that where the risk comes in for them is more people
gradually shifting their focus over the next 3-4 years but that their next 6-12 months should probably be pretty
good.
[00:59:03]
Q: Is there anything you think the investor community should know about Scotts’ management team and its
ability to execute on priorities, or anything you think is commonly overlooked?
BH: I think that if you look at Scotts’ history of execution, it tends to be a company with very strong marketing
and product execution with a visionary but very distinctive CEO leading the charge. Look at James Hagedorn
as setting the direction where everyone is going and he’s there on the investor calls, you can get a feel for his
thinking and his priorities and then just think about the fact that this is a company that really does tend to do
what it says it’s going to do. It’s a strong executing kind of company. I think your questions are is the vision
where you believe that things are going to go and then just do you believe that the lawn and garden space
and/or the hydroponics space can truly grow in long-term ways or are we hitting a peak because it is a
counter-cyclical business and then you would expect to see it retrench a bit as other parts of the economy get
better.
[01:00:38]
NH: I think that’s a good place to end the Interview. Let me say thank you, Brendon, for taking the time today,
it was a really insightful Interview and a lot to unpack. Clients, if you would like to speak to Brendon in a
private call or meeting, please let your relationship manager know. Thank you, clients, for joining Third Bridge
Forum’s Interview today. Goodbye.
BH: Thank you.
Transcription ends at 01:00:53 of the recorded material
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