Debra Borchardt
The challenges presented by the cannabis industry are harder to combat than those presented by COVID-19, at least according to the CEO of Scotts Miracle-Gro.
During Scotts (NYSE: SMG) latest earnings call, CEO Jim Hagedorn made some fairly positive comments about the cannabis industry, while also delivering an unvarnished assessment of the challenges.
“All over the cannabis sector, there are folks winning big,” Hagedorn said. “They’re adopting new technologies, advanced growing techniques, and diversified offerings. Many of them are legacy businesses. They are producing high-quality products and getting prices per pound greater than what they were a few years ago. They represent the heart of the cannabis industry.”
The company recently hosted a summit that brought together industry stakeholders to assess “where the industry is now and where it is headed,” Hagedorn noted.
“What we learned is that those at the top want solutions and partners to help them grow and scale,” he said. “We have the strength to fill this need. We’re aligned with the cost and quality advantages they need to help them be successful.”
A key to that success, according to Hagedorn? The lighting.
“Guess what they’re running? Our best and most expensive lights, OK? And they’re getting the results out of those lights, which are no joke,” he said.
Cannabis Problems
But all is not rosy in the cannabis industry.
For one, summit participants concluded that the industry will and must consolidate.
“A wicked shakeout is underway, and we expect it will result in the top 25% getting even stronger,” Hagedorn said.
To that end, Hawthorne is looking at noncash deals that advance its scale and capabilities. “If we take no action, we’ll be left behind,” he said.
The problems in the industry, according to Hagedorn, are largely caused by two issues: oversupply and regulatory instability He noted that:
- Bureaucracy and poor planning are causing oversupply – but consolidation will help to resolve that.
- Legislators and regulators are driving market instability through failure to adopt federal level reforms, such as the SAFE Banking Act or changes to 280E, to state-level issues, as seen in New York – which Hagedorn called “embarrassing.”
Chris Hagedorn, general manager of Hawthorne, said that the industry is finally getting some tailwinds, though.
“They may take another month or two to hit us, just where we occupy kind of the value chain in the industry that once those and producers do see some price recovery for their products that will work its way through to us,” Chris Hagedorn said.
The company also sees upside in the emerging markets on the East Coast.
Hawthorne Reaction
Scotts said it is working towards getting Hawthorne to break even.
The company restructured its product line to the 58 brands that are most profitable and important to these players, creating the Hawthorne Signature Plus portfolio.
Jim Hagedorn was also asked about previous plan to spin out Hawthorne, but he said that was off the table for now. He said that Hawthorne would need to be a business that is north of $1 billion in top line and sort of north of $100 million on the bottom line before it would be a market leader that is sustainable.
“As I look back in my nearly three decades with Scotts Miracle-Gro, this by far has been the hardest period I’ve experienced,” Jim Hagedorn said. “From a challenge and difficulty point of view, it was way harder than COVID.”
