Last April, Scotts Miracle-Gro made a big splash in the cannabis industry by buying one of New York State’s ten vertically-integrated cannabis companies, Etain, for $247 million. Scotts didn’t make the purchase directly, it was done through the company’s investment arm, RIV Capital, which is managed by Mark Sims, Scotts’ former senior vice president for strategy and mergers and acquisitions. He is now RIV’s President and CEO.
It may seem strange that a company that sells $4.9 billion a year of potting soil and gardening supplies is suddenly making a play in the cannabis business, but in an interview we conducted with Sims last week, he made it clear there was nothing sudden about RIV Capital’s purchase. Over a period of years, Sims, Scotts, and RIV Capital have been carefully building a portfolio of ancillary cannabis services companies to help them better understand the industry.
Sims says RIV and Scotts are in cannabis for the long haul, and they are working on plans to build out Etain’s position in New York in a big way.
This interview has been edited for clarity and brevity.
Grown In: How does a one time consultant and M&A manager become interested in cannabis?
Sims: The one thing I would say, when I was at Scotts running M&A, the Hawthorne business unit, my team was responsible for M&A, but also strategy and competitive intelligence, so a lot of what we did was in support of the Hawthorne business unit. If you think about Scotts, there’s two divisions, the consumer lawn and garden business where 70 to 80% of their business is at Home Depot and Walmart. It’s data rich. There’s people who study what is the market for Miracle-Gro ten pound potting soil and things like that. So you have this data rich business that on a daily basis gets point of sale information from all their customers.
You then have the Hawthorne business unit, that’s selling to a fragmented retail space. You see the sales into the retailers, but you don’t know what the pull through is or what those customers look like. So my team spent a lot of time looking at and trying to analyze what is the overall size of the input supply market. Ultimately the way we did that was look at what is the overall size by state of the cannabis market and the cannabis market in each state. Is this state a net importer or net exporter of cannabis? All of this was educated guessing.
We really looked at the full value chain of the cannabis industry, and I just find it fascinating, in terms that you have a pretty efficient black market in the U.S. If you go to any town in America, and you say, let’s get some weed, you can find it.
So you have this efficient market, and this is with my strategy hat on, that you now somehow – without breaking it because it’s been working pretty efficiently – need to bring it into a regulatory framework. But as you saw in California in 2018, they broke it. As they tried to transition it, they did things and broke it.
Outside of the product side of the cannabis industry, I’d really like to be part of the creation of a market.
It’s really the creation of a legal industry, and being part of that was really pretty cool.
Grown In: One of the first ingredients for underground cannabis is Scotts Miracle-Gro. Does that give you an insight into where there is strength or interest? Does that provide you with some sort of competitive advantage?
Sims: I think it does. The Hawthorne business, as they grew, you might say they’re just selling input supplies, lights, filters, nutrients, media. But really through Hawthorne’s sales and tech team, they got into a lot of grows, to go in and help the end consumer with product knowledge. They spent a lot of time with indoor grows across the US, helping them use the product more effectively.
So, by having that high frequency, high volume of visits to all kinds of cultivation, they see what works and what doesn’t work. They have line of sight to who they think are some of the best growers in the industry. That’s helpful for RIV in terms of making introductions.
Grown In: How do you think about the price you paid for Etain? $248 million versus for $84 million in 2021 for a similar sized company in New York, and $88 million for Med Men one month after your deal. How do you justify the price you paid for that?
Sims: I believe the $84 million [deal] was pre- the announcement of adult use. And obviously the Med Men deal was tied up in litigation.
I know the way we think of it as an incredible opportunity in New York. I’d say two factors: The cultural influence New York has on the rest of the country and the world, which makes it a super unique geography versus in New Jersey or Connecticut or Massachusetts. Just having New York City is tremendous.
When I think about where are the people, which is a good way to start in terms of selling any product. You’ve got 20 million residents in the state of New York, but you have over 250 million visitors every year. You’ve got a good base, but also a heavy tourism industry.
Grown In: Etain owns a cultivation license, but I don’t believe it has a very large facility right now. What are your build out plans and how do you plan for the New York market when so much is in flux?
Sims: Etain does have a cultivation facility, and the majority of the products they sell they produce. But it is relatively small. I want to say in total about 12,000 square feet with a much smaller cultivation space. Prior to them putting themselves up for sale, they were already undergoing an expansion, so they were going to triple the canopy size in the Chestertown facility. That is underway and we expect that to come on line in the fall, which will be helpful when we think about the ramp up to adult use.
Prior to the deal, we were able to bring Hawthorn people in and improve a lot of stuff, that process is ongoing.
Grown In: But even 36,000 is pretty small.
Sims: And that’s 36,000 square feet of total space. Not canopy.
What we’re looking to do, and we announced this previously, is we’re looking at building a flagship facility. In Chestertown, it’s all hybrid greenhouse. But we believe that to grow the best product, you need to that indoor. Hopefully we’ll be able to announce soon where we’re going to go with a much larger facility, and that will be more on the scale of 80-100,000 square feet of canopy. Of course, all of this is pending regulatory approval.
Over a couple different phases the intent is to build a very large cultivation to ramp into the adult use market, obviously there’s room for a phase three and a phase four as the market continues to scale.
Obviously you want to know first what are the form factors that are popular in New York. We know what’s popular through data in other states. But I think New York, given the tourism angle, I think we want to see how things play out over time.
Grown In: There’s going to be a lot of underground market activity in New York State. How do you think about that when you plan for your own expansion and growth in the state?
Sims: I would say there’s already a lot of activity, right? That’s something we voice to the regulators, when you go to New York City, the Etain location, our team mapped out that there’s 12 unlicensed dispensaries within like a three mile radius of that facility. And that’s probably not counting the bodegas and shops that will sell you product illegally.
A lot of it is California product, making its way to New York. That’s not new. The supply chain for black market cannabis has existed for a long time. We’ve asked the regulators to think about what are you going to do?
They’ve said that until you have legal adult use sales – and I think if you ask the mayor of New York they’re going to say they have a lot more pressing issues they have to address.
But they need to think through how they’re going to fix that. Not just for Etain’s sake, but for consumers’ sake, because you don’t want to have a bad experience with a product you’re getting from an unlicensed dispensary, which may not be California licensed product, it may come from somewhere else.
You also have all these social equity licenses, which is fantastic because I think it’s going to create a nice wholesale market for us. All of these people will invest a lot of time and money into building their retail footprint, and then a person a block away will be able to do it with impunity without all the regulations and can undercut on price.
The other piece is, if the state of New York, if they want to collect taxes, all of the black market sales aren’t taxed.
So how do you fight that? We need to focus on what we can control. Creating the best products that give consumers a great experience consistently over time. And then you need to win those consumers every day. Delivering for the customer, that’s ultimately going to be the way to win.
Grown In: Are you thinking about other markets? You’re based near Cleveland. What do you think about Ohio, Pennsylvania, any other states?
Sims: Obviously there’s a lot going on in the space. A lot of people thought it would be an easier road, but it’s not. I don’t see any federal legalization, so they think it’s time to get out. There’s other folks we talk to that are feeling that if we build a bigger armada, we can weather the storm successfully.
As we think about opportunities, we think about tier one geographies of Florida and Illinois, Michigan – although Michigan is pretty competitive – Massachusetts, Pennsylvania. Where are the people at?
What we look through the lens is, are there other operations or geographies that can help us accelerate our brand strategy. We’re not marrying up with a company that needs lots of capital and attention, because we believe we have such an opportunity in New York, we want to maximize the opportunity in New York, and not get distracted by a Missouri or a Maryland, a smaller state.
But we’re still being highly opportunistic in terms of are there other operations we could marry up with to accelerate the strategy.
Grown In: You’re still invested in ancillary businesses like Biolumic and Leaflink. How does that fit into your strategy?
Sims: We’re not really looking to write more checks to those companies, nor are we looking to expand the portfolio. There’s some of these companies that we are invested in from the perspective that they can help us in New York or other geographies we want to go to in terms of technology or know how they are able to give us.
And there are parts of the portfolio that we think about how do we come up with ways to monetize that investment, so we can free up capital for the operations side of the house.
Grown In: So, you made a shift, then. You’re really going to be focused on cannabis operation.
Grown In: A lot of pure play cannabis companies have an end goal of some kind of acquisition by a CPG of tobacco company, once federal law changes. What’s the end goal for a hybrid company like RIV Capital?
Sims: At the highest level it’s to be one of the finest cannabis companies in the world, so that’s pretty big aspirations, but I don’t think it’s to sell out to some of the more established players in alcohol, tobacco, or the spirits space.
If you think about the Scotts Miracle-Gro company, they currently are a key stakeholder, they use the convertible debt instruments, not because they want to have debt and use that method, it was what was allowable by their banks. But they’re in it for the long haul. If you listen to investment calls with Jim Hagedorn, they’re really bullish on the industry in general. They have a 42% ownership on a fully convertible basis. They plan to continually own a significant portion of RIV Capital.
The way I see it is that Scotts is doing this as an offensive play. When you think about alcohol, tobacco, beer, those are all defensive plays. Versus you think about what Scotts is doing, How do we create more value for our shareholders at Scotts. They think owning the industries and brands will unlock a lot of value for the shareholders.
Grown In: So, you could be seeking additional investment outside from Scotts Miracle-Gro to increase capital RIV has on hand?
Sims: Yes. I think we’re interested in people who have a like-minded, long-term outlook. Those are the types of investors we enjoy talking to.
Grown In: One last question: Name two companies you like a lot that are not in the cannabis business.
Sims: The one that I look at when I think about our house of brands – and I know that’s kind of cliché – LVMH is one that I find interesting. If you look at their history, they started with a lot of ancillary investments into all kinds of leather goods and footwear for those fashion houses. But then over time they assimilated that into a robust portfolio.
And the interesting thing to think about what they do, when they think about their brands and their creative people, their goal is to take as much off their plate as they can, whether that’s design or marketing, and they say we’ll do all these other things for you. It’s a decentralized model, with a shared back office.
And then when you think about Scotts Miracle-Gro, I always joke they put dirt in a bag and sell it. That’s not a trivial effort, and they are able to get a premium for the product they produce. When you think about the market share they have in their space. That’s pretty interesting if you apply it to a $100 billion market, and not a $10 billion dollar market on consumer line garden.