The Scotts Company History

Address:

14111 Scottslawn Road
Marysville, Ohio 43041
U.S.A.

Telephone: (937) 644-0011
Fax: (937) 644-7183

Website: www.scottscompany.com

Public Company
Founded: 1868
Employees:2,394
Sales:$751.9 million (1996)
Stock Exchanges: New York
SICs: 2873 Nitrogenous Fertilizers; 2874 Phosphatic Fertilizers; 3524 Lawn & Garden Tractors & Home Lawn & Garden Equipment; 6719 Holding Companies, Not Elsewhere Classified

Company Perspectives:

This new company has the two strongest national brands--Scotts and Miracle-Gro&mdash+us many others, in an industry where many of our competitors are regional producers of undifferentiated products. Combining the strengths of The Scotts Company--its brands, manufacturing and research capabilities, and distribution network--with the Miracle-Gro organization's proven advertising and marketing expertise, its entrepreneurial culture, and the power of the Miracle-Gro brand&mdash⁄ould create significantly increased value for the company's shareholders.

Company History:

With just over half of the do-it-yourself lawn care market, The Scotts Company is America's leading producer and marketer of grass seed, fertilizers, herbicides, and pesticides. In addition to its consumer lawn care business, Scotts holds over 10 percent of the commercial lawn care market. Professional clients include three-fourths of America's top 100 golf courses as well as such Major League Baseball venues as Fenway Park, Yankee Stadium, and Wrigley Field. The Scotts family of brands includes organic soils and mulches under the Hyponex label, which boasts a 45 percent stake in its market, as well as Miracle-Gro plant foods, with a dominant 59 percent share of their segment. By the end of 1997, operations in Europe, Asia, Africa, Australia, and Latin America generated about 10 percent of Scotts' annual sales.

Scotts' sales increased from $413.6 million in 1992, when the company went public, to over $750 million in 1996. Some of this growth came from acquisitions, including the 1995 purchase of Stern's (now Scott's) Miracle-Gro Products, Inc. A restructuring of the merged companies moved several Miracle-Gro executives into key positions at Scotts. Theodore Host, president since 1991 and CEO for scarcely one year, tendered his resignation in 1996. Charles M. Berger, a former member of Miracle-Gro's board of directors, was hired as president, CEO, and chairman of the board that same year.

19th-Century Origins of O.M. Scott & Sons

The company was created by Civil War veteran Orlando McLean Scott, who moved to the small central Ohio town of Marysville in 1866. Scott worked at a seed elevator for four years before purchasing his own business, a hardware store, in 1870. The founder's "white-hot hatred of weeds" led him to start a seed-processing sideline, sorting weed seeds from crop seeds for local farmers. While his 99.91 percent weed-free farm seed cost more, Scott assured his customers that it would save them time and money by reducing weeding chores and increasing yields. Although he had added grass seed to the product offering by 1870, this segment did not become an important part of the business until the early 20th century.

Scott's sons Dwight and Hubert joined the company in the first decade of the twentieth century. Dwight has been credited with the launch of Scott's mail-order grass seed business in 1906. This new distribution outlet spread the family's reputation throughout the region to Pennsylvania, Virginia, Kentucky, and West Virginia. The company made its first commercial sale to Long Island, New York's Brentwood golf course in 1916. By 1921, Scotts seeded one-fifth of America's golf courses.

In 1928, O.M. Scott & Sons launched Turf Builder, the first fertilizer formulated specifically for grass. The growth agent combined soybean and cotton seed meals to provide the extra nitrogen needed for a greener, healthier lawn. The company launched its own promotional magazine, Lawn Care, in 1928 as well. According to Scotts, the publication soon became "the most widely read turf bulletin in print," with millions of subscribers by the post-World War II era.

Research Drives Mid-Century Growth

Americans made a mass migration from the cities after World War II, and lush, green lawns became a hallmark of suburbia. Not coincidentally, chemical fertilizers, herbicides, and pesticides came into their own during this period. Named for second-generation leader Dwight Scott, Scotts' Marysville research complex emerged as a harbinger of growth at this time. The company placed particular emphasis on weed killers in the immediate postwar years, launching 4-XD broadleaf herbicide in 1945, followed by Scutl, Clout, and Halts for crabgrass in the 1950s. In 1956, the company used new chemical products and processes to create a new Turf Builder formulation that weighed less than the original, smelled better, and was gentler to grasses. Scotts also developed the first lawn spreader and the first patented Kentucky bluegrass, as well as other innovations for home and commercial lawns. The research campus itself grew to include four greenhouses, 13 laboratories, a library, and over 100 acres of experimental grasses.

The Scotts ownership structure evolved from full family control to a closely held company in the postwar era. Then, in 1971, O.M. Scott & Sons was acquired by ITT Corp.'s Harold Geneen, who reportedly snapped up the profitable firm after a 15-minute analysis of its balance sheet. Although the lawn company remained profitable throughout its 15-year membership in the conglomerate, it became clear that Scotts was not very compatible with ITT. Tadd C. Seitz, who had joined Scotts in 1972 and advanced to president and CEO in 1983, realized that his small segment of the huge conglomerate was getting lost in a labyrinthine bureaucracy. In 1989 he told Business First-Columbus that Scotts "continued to get less and less attention at a time when we needed some ways to improve business."

Seitz led a highly leveraged buyout of the company in 1986. Scotts' managers borrowed $190 million (about 90 percent) of the $211 million price tag from the investment banking firm of Clayton Dubilier Inc. O.M. Scott & Sons became the primary subsidiary of CDS Holding Corp., a private company 61 percent owned by Clayton Dubilier. Many of Scotts' senior executives took out second mortgages and personal loans in order to buy into the deal.

Scotts was rejuvenated under Seitz, who was able to quadruple the company's sales during his tenure. Given the slow, two percent to three percent annual growth rate of the fertilizer industry, Seitz sought expansion through a combination of new product introductions and strategic acquisitions. Burgeoning environmentalism in the early 1990s spurred Scotts' interest in the development of new organic fertilizers like Iron Bull, iron-fortified steer manure. In 1990, Scotts formed a partnership with Sandoz Crop Protection Corp. to research and develop biological pesticides using insect viruses, bacteria, protozoa, and plant extracts. The aim was to create narrowly targeted products that would have a strictly limited effect on the environment.

Scotts debt was reduced to $125 million by the fall of 1988, when a restructuring allowed the $111 million acquisition of Hyponex Corp. The lawn care company went public in 1992 as The Scotts Company, selling 12.5 million shares at $19 each, using the proceeds to cut debt to just $32 million. That year, the company acquired Republic Tool and Manufacturing, a manufacturer of fertilizer spreaders and other lawn and garden equipment. The public offering also helped Scotts sever its ties to investment bank Clayton Dubilier through a 1993 stock repurchase. With sales of over $466 million that fiscal year, Scotts negotiated the purchase of Grace-Sierra Horticultural Products Co. in 1994.

Merger of Scotts and Miracle-Gro in 1995

Scotts most important acquisition came in 1995, when it announced the purchase of Stern's Miracle-Gro Products through an exchange of $195 million worth of equity. With about $115 million in annual sales, Miracle-Gro was much smaller and younger than Scotts. The gardening company had evolved out of the business relationship between nurseryman Otto Stern and advertising executive Horace Hagedorn. Hagedorn helped Stern build a small but profitable mail order plant business in the late 1940s. Around this time, Stern began including a tiny sample of water-soluble fertilizer with each plant he sent out. This extra boost helped get the "starts" well established, thereby assuring customers' gardening success. It was not long before Stern's clients were clamoring to order more of the growth agent. In 1950, Stern and Hagedorn launched a partnership to market the fertilizer, which adman Hagedorn dubbed Stern's Miracle-Gro. Despite the name, it was Hagedorn and his family who eventually controlled the business. Over the years, they developed water-soluble foods for roses and tomatoes as well as tools designed to make application of fertilizer easier and more convenient. Sales grew from $165,000 in 1960 to $55 million in 1980 and $115 million by 1995.

Though Miracle-Gro had less than half the sales of Scotts, the Hagedorns emerged from the 1995 transaction as Scotts' leading shareholders, with over one-third of the stock. The Hagedorn influence became increasingly evident in the months and years to come. Early in 1996, Horace Hagedorn and the Scotts board of directors ousted CEO Theodore Host barely 11 months after he had taken office. At that time, Scotts recruited former Miracle-Gro director Charles M. Berger from H.J. Heinz Co. to serve as president, CEO, and chairman of the board. A restructuring that same year found former Miracle-Gro director Jim Rogula in charge of Scott's largest business segment, Consumer Lawns. Former Miracle-Gro president John Kenlon led the Consumer Gardens Group and, perhaps most significantly, Horace Hagedorn's son, Jim, was promoted to the head of all U.S. business. Tadd Seitz, who had served as CEO from 1983 to 1995, ended more than a quarter-century at Scotts with his September 1997 retirement.

With new management came a new marketing strategy. Under Host, Scotts had pursued the "push" method of marketing, using dealer promotions to get more product on store shelves. Spurred by stockholder unrest over weak profitability--net income had averaged just 2.6 percent of sales in the four fiscal years from 1991 through 1994--Host launched a major promotional campaign in 1995 in an effort to augment sales and market share. The program offered financial incentives to retailers who bought product in the fall of 1995 that would be delivered to stores in the spring of 1996. The strategy was successful on one level; it increased sales from $733 million in fiscal 1995 to $752 million in fiscal 1996. But instead of boosting profits, the deep discounts to retailers resulted in a $2.5 million loss on fiscal 1996. Host forfeited his job, and Scotts' stock price slid to a low of $16.75.

Given the fact that it was cofounded by an advertising executive, Miracle-Gro had a long-established strategy of "pulling" customers in with print, radio, and television ads. By devoting millions to its ad budget each year, Miracle-Gro created high demand for its product, thereby enabling it to command a high profit margin from retailers. CEO Berger sought to shift Scotts to pull marketing by increasing its advertising budget and building on its highly recognized, but heretofore under-exploited, brand. The new strategy focused on creating what Horace Hagedorn called "the Procter and Gamble of lawn and garden."

The Miracle-Gro cofounder stayed with Scotts long enough to see it return to profitability during the first half of fiscal 1997, then retired that spring. With a refocused marketing strategy in place, the new Scotts team turned to boosting the operational side of the business in 1997, scheduling $40 million in capital investments for the years leading up to the turn of the 21st century. This combination was expected to boost annual sales past the $1 billion mark by the year 2000.

Principal Subsidiaries: Scotts Grass Co.; Scotts Sod Co.; Scotts Energy Co.; Scotts Pesticide Co.; Scotts Green Lawns Co.; Scotts Plant Co.; Scotts Tree Co.; Scotts Service Co.; Scotts Products Co.; Scotts Fertilizer Co.; Scotts Park Co.; Scotts ProTurf Co.; Scotts Control Co.; Scotts Professional Products Co.; Scotts Turf Co.; Scotts Best Lawns Co.; Scotts Weed Control Co.; Scotts Golf Co.; Scotts Garden Co.; Scotts Design Co.; Scotts Tech Rep Co.; Scotts Broad Leaf Co.; Scotts Insecticide Co.; Scotts Spreader Co.; Scotts Improvement Co.; Hyponex Corp.; Old Fort Financial Corp.; O.M. Scott & Sons, Ltd. (U.K.); Republic Tool & Manufacturing Corp.; Scotts-Sierra Horticultural Products Co; Scott's Miracle-Gro Products; O.M. Scott International Investments Limited (U.K.).

The Scotts Company History

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