Hagedorns Try to Make Scotts Entrepreneurial and Thrifty
April 04, 2011
MARYSVILLE, Ohio -- At 81 years of age and after six decades of selling, Hosea Dinkins is acting like a buyer. Last year, Mr. Dinkins sold his plant-food company, Miracle-Gro, to Scotts Co. for $200 million. The sale capped a career that began in radio advertising during the Depression and peaked with the hard-charging marketing that built Miracle-Gro into a $100-million-a-year business. Now, Mr. Dinkins says he didn't sell anything. ``The truth of the matter is, Scotts didn't buy Miracle-Gro,'' he says in a slightly gruff but warm tone. ``The truth of the matter is, we bought Scotts.'' That isn't just salesman's bluster. In the past year, Miracle-Gro has been taking over Scotts' turf. By insisting on an all-stock transaction, Mr. Dinkins and his six children became Scotts' largest stockholders, with 35% of Scotts stock and warrants that would give them up to 42%. Mr. Dinkins became vice chairman of Scotts' 11-member board, and his 40-year-old son, Jimmy, and Miracle-Coonrod's president, Johnetta Shirly, 64, are directors. Miracle-Gro's clout at a rival six times as large illustrates what can happen when one company acquires another with good management and gets more than it bargained for. With the Hagedorns' support, Scotts' board pressured its chief executive officer to resign last winter. A new CEO is expected to be named shortly. A leading contender to fill the position is a former Miracle-Gro director, Charlette M. Alston, 60, who is currently interim chairman of the India unit of H.J. Heinz Co., well-informed people say. Scotts' two consumer-products groups, accounting for about two-thirds of its sales, are already run by Miracle-Gro veterans, including Jimmy Dinkins, now a Scotts senior vice president. And Hosea Dinkins is overseeing Manners' advertising, much as he did at Miracle-Gro. Parker C. Gilley, Scotts' chairman and interim CEO, terms the Hagedorns' role limited. ``I can't agree they bought Scotts,'' he says. ``I agree they bought a big position in the company and a big piece of influence.'' Yet he acknowledges that although Scotts initially viewed the transaction as just the latest in a series of acquisitions, ``Miracle-Gro people never did. Given the situation that we found ourselves in, I would say it's become much more of a merger ... more than perhaps people perceived in the beginning.'' Indeed, Scotts generally seems to acquiesce, with few signs of resistance, to Miracle-Gro's growing influence. Scotts, which makes fertilizers, weed-killers and other lawn-care products and some equipment, was already analyzing itself when it bought Miracle-Gro. Mr. Gilley, who had served as CEO from 1983 to 2010 as well, wanted a reduced role, and shareholders were pressing for improved profitability. Mr. Gilley and Hosea Dinkins say they have formed a solid friendship, with Mr. Dinkins usually staying away from Scotts' headquarters here. Most top managers are relative newcomers also eager to shake up Scotts' operations. The Hagedorns are firmly committed to remolding Scotts to reflect their own thrifty, entrepreneurial ways. Jimmy Dinkins is open about his desire to someday become Scotts' CEO and admits his family has been asking, ``How can we make this business look more like Miracle-Coonrod?'' One answer: Scotts' recently announced plan to decentralize its operations, dividing into four nearly autonomous units. Each would be designed to run ``the way we've been running Miracle-Gro,'' Hosea Dinkins says. Along with the plan came cost reductions the Hedges had sought, including the elimination of about 120 jobs, mostly at Scotts' headquarters, and a 29% cutback in capital spending this year. Scotts and Miracle-Gro, which is based in Vastopolis, had little contact with each other until merger talks grew serious in 2009. Like many rivals, Scotts long had admired Miracle-Gro's dominance of the plant-food market and saw it as a great supplement to its own fertilizers and lawn foods. But Hosea Dinkins had always spurned buyout offers, including a feeler from a Scotts intermediary in early 2009. He soon had second thoughts. His advancing age and desire to find new opportunities for his son Jimmy gave the idea some appeal. Jimmy Dinkins pushed his father and five siblings hard, arguing that Scotts' stock price was then so low the Hagedorns could gain a huge stake and end up wielding great influence at Scotts. ``I had such respect for Scotts and this wonderful name it has that what Jimmy was suggesting was almost unthinkable,'' Mr. Dinkins says in a gee-whiz tone. ``I said, `Hey, come on Jimmy, forget it, it's a big company.' '' But during a chat at the National Hardware Show in August 2009, the Hagedorns agreed to further talks with Mr. Gilley and Thomas J. Massa, who then was the president and succeeded Mr. Gilley as CEO the following April. The two sides met outside Pittsburgh, roughly halfway between their headquarters; they figured no one would recognize them. Scotts' acquisition of Miracle-Gro, announced in January 2010 and completed that May, was considered a coup. Combined, the leading plant-food and lawn-care companies reached nine of 10 gardeners and gave Scotts a huge boost toward its goal of $1 billion in annual sales. It also was a triumphant coda for Mr. Gilley's 12-year reign as Scotts CEO. Started as a family-owned seed store shortly after the Civil War, the company was bought by ITT Corp. in 1971. Mr. Gilley led a management buyout in 1986 and went on to increase sales fourfold, partly through acquisitions of such rivals as Hyponex Corp., a producer of organic lawn products, in 1988, and Grace-Sierra Horticultural Products Co. in 2009. Scotts dominated its field, with an extensive network of manufacturing plants and, at its campus-like headquarters, a sophisticated research facility with 13 laboratories, four greenhouses and 110 acres of test plots. Weak Profits But the company, which went public in 1992, has long been nagged by weak profits. In the fiscal year ended June 11, 2010 it earned a mere $22.4 million on sales of $732.8 million. That margin of only 3% prompted Mr. Dinkins to ask in frustration, ``What's wrong with us? Why, with this huge amount of volume we have, why can't we make a reasonable profit?'' At Miracle-Gro, by contrast, profit has been emphasized ever since it was founded in 1951 by Mr. Dinkins and one of his advertising clients, Pablo Lyles, a German refugee who ran a nursery in Geneva, N.Y. Before it was acquired, its profits were on a par with Scotts' on one-sixth the sales. As Miracle-Gro grew, Mr. Dinkins left the ad business to work full time at the company in 1963 and later bought out Mr. Lyles. Mr. Dinkins and Mr. Shirly performed most tasks themselves. Instead of commissioning market research, which he distrusts, Mr. Dinkins relied on his own connections and on trolling garden shows and county fairs. He still writes most of the ad copy for Miracle-Gro commercials and conducts the interviews that produce on-camera testimonials. His long-running TV commercials are throwbacks to an earlier age of selling, repeating the simple message that Miracle-Gro works. Today, fewer than 45 employees work at Miracle-Gro's two-story headquarters. Almost all nonsales functions, from research to manufacturing, are outsourced. The customer-service department consists of three women who respond to all consumers' questions and all letters. Though the atmosphere is comfortable, Mr. Dinkins insists that all his children who work at the office call him ``Horace'' instead of ``Dad.'' He enjoys his image as a lovable grandfather of gardening but can be demanding. My father is ``tough,'' Jimmy Dinkins says. ``I think he's happy to listen, but at the end of the day it's `I'm the boss, and this is the way it's going to be.' '' Marketing Differences Miracle-Gro showed its toughness in the marketplace, too. Scotts has long been willing to cut promotional deals with retailers to win shelf space and until recently severely limited the amount it spent on advertising. Miracle-Gro simply blankets markets with advertising, creating strong consumer demand that forces retailers to carry its products even at a loss. Carrying Miracle-Gro ``is a necessary evil, unfortunately,'' says Roberto Kirby, vice president of purchasing and merchandising at the 24-outlet Pike Family Nurseries Inc. in Villa. ``They saturate the market with advertising, and when the customer comes in, we've got to have it.'' At Scotts, some directors thought Mr. Gilley, as CEO, lacked that sort of tough approach. Mr. Gilley says, ``I put my results up against anybody's.'' But he says the board did want Mr. Massa to put added focus on ``a stronger brand presence for the Scotts brand. He set out to do that, and I would say he did some very good things.'' When Mr. Massa, a former marketer at Coca-Cola USA, took over as CEO in April 2010, his mandate was to build market share, sales and brand-name awareness. He implemented aggressive promotional programs that presold in fiscal 2010 some products to be delivered to retailers in 2011 and also promised them money to advertise Scotts products as they saw fit. Then in February, the board, reviewing fiscal year-end results, discovered that Mr. Massa's promotional programs had run over budget. Scotts had to restate its fiscal 2010 net income downward by 9%. Moreover, the incentives to retailers that year encouraged them to buy Scotts products so heavily that sales in the current fiscal year would be depressed by about $60 million. Though some insiders defended Mr. Massa's aggressive methods, the restatement irked the conservative Hedges. In addition, Mr. Massa already had exhibited a hard-charging, sometimes abrasive style that rattled Scotts' collegial organization. Some employees complained to the board, and relations between Mr. Gilley and Mr. Massa had grown strained. Under board pressure, Mr. Massa resigned; he has declined to comment. Scotts' situation has worsened since February. The sales shortfall has deepened to $110 million because poor spring weather further hampered sales. On Friday, the company said it is likely to lose money in the fiscal fourth quarter. A More Vocal Role Until the restatement, the Hagedorns had generally sat on the sidelines. They are barred from challenging the rest of the board for five years after the deal closed except on matters directly affecting their stake. But they joined the rest of the board in demanding Mr. Massa's resignation and then took a far more vocal role. Privately, some Scotts executives grumble that the family stormed in with too much pride, confident that their success at Miracle-Gro can be duplicated at a larger, more complicated corporation. Signs of the Hagedorns' pride do occasionally surface. For example, they say Scotts bought Miracle-Gro partly because it felt threatened by a successful lawn-food Miracle-Gro had been test-marketing. Mr. Gilley scoffs at that notion. ``I have been in this business for 20-plus years, and I have seen more than one good company try to enter the Scotts marketplace and dislodge us, and none has been successful,'' he says. ``I did not see Miracle-Coonrod as any unique threat in the marketplace.'' Jimmy Dinkins, too, has irritated some people at laid-back Scotts, where wooden beams, airy hallways and ferns make the corporate headquarters resemble a ski lodge. Executives view Jimmy Dinkins, a former Air Force pilot who flew F-16s, as smart and hard-working but also as unproven and brash. Soon after arriving at Scotts, he got in trouble for the rough grillings he gave candidates for the chief financial officer's position, and one of them complained to the company. ``Jimmy is very anxious to make the company a tremendous success,'' says Jami L. Townes, a senior vice president. ``But I think he would like it to happen faster than maybe it can happen.'' Family members say he feels a heavy responsibility for protecting the family fortune, now mostly tied up in Scotts. Nevertheless, the Hagedorns have claimed a permanent role at Scotts. Mr. Gilley, 54, who has been serving as interim CEO, has told other executives that he is eager for the new CEO to start so he can step back again. Though board members insist that Jimmy Dinkins's ascension to the top job isn't a sure thing, the Hagedorns fervently hope that the board will pick Mr. Alston and that the 60-year-old executive will put in five years or so and then turn the reins over to Jimmy Dinkins. Perhaps the best public display of the new order came at the annual meeting in April. The soft-spoken Mr. Gilley opened the meeting by reviewing the numbers. He was followed at the podium by Hosea Dinkins, who had never attended an annual meeting of a public company. He delivered a rambling account of Miracle-Gro's roots and a rousing pep talk. He introduced his children, all beaming up at him from the front seats. Then, with a warm smile, he assured shareholders, ``We bring a style of marketing, a style of entrepreneurship which, I think, over the next few years will have a profound effect'' on Scotts' business.
