At the time of the announcement, Scotts Miracle-Gro Company’s (SMG) acquisition of Sunlight Supply Inc last April was forecast to boost sales in Scott’s Hawthorne Gardening subsidiary to approximately $600 million, up from $290 million. Yet due to a slower-than-expected rollout of marijuana legalization across the United States and prolonged winter weather conditions, SMG stock price slipped nearly 30% in August, in part due to sales volumes at Hawthorne being lower than management expectations. Because SMG is considered a heavyweight player in the US cannabis market and amidst a climate of regulatory uncertainty, what does this signify for the industry as a whole?
Strategic choices
SMG’s purchase of Sunlight helped to not only strengthen its approach of securing exclusive distribution agreements but also helped bolster their strategy of acquiring brands. Buying existing brand names was central to growth because it made more sense to invest in an already trusted product rather than spend capital on a new ‘me too’ product. The subsequent purchase of large nutrient companies succeeded in Hawthorne not only putting a dent in their competition but allowed them to realize a profit from these lines from a manufacturer’s position, rather than simply a distributor.
In addition to acquiring these companies, Hawthorne also eliminated many overhead costs regarding infrastructure around warehousing and distribution, as well as administrative functions. Overall, retailers found it easier to deal with the consolidation of products from one vendor.
Secret sauces
At a simplistic level, the equipment related to a growing operation revolves around lighting, controllers, and nutrients. There is a constant race with firms keeping ahead of the technology behind lighting fixtures, as can be seen with the move towards LED lights and updated EL controllers that allow spectrum tuning (though experts question the effectiveness of spectrums, rather than intensity, improving yields).
Whilst nutrients are regarded as a ‘sticky’ product within the industry due to growers equating certain nutrients to being the ‘secret sauce’ of their success, commercial producers are beginning to realize they can simply create their own nutrient line from scratch. Powdered nutrients have also seen a resurgence because they can be manufactured for the same price, yet sold for less because they are easier to ship and store.
Legislating recreation
Revenue looks positive for countries like Canada, wherein mid-October recreational use became legal, meaning a short-term benefit on equipment in that region. Experts predict that within the US, the East Coast will be next with the potential for legal marijuana use in states such as Massachusetts, Maine, and Rhode Island. Observers need to pay close attention to the laws, however. For example, whether states are going to go down the medical or recreational route does not necessarily indicate future status. Avoidance of a boom and bust market will also be found in legislative detail, for instance, the number of companies allowed to open retail dispensaries, or whether dispensary licenses will be distributed on a lottery-based system. Ultimately projections of equipment use and sales will depend on if people are allowed to grow for themselves or not. It is predicted that once the US midterm elections are underway, we will then get a better chance to examine laws that are related to growing and how many dispensaries or growing operations will be allowed per state.
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