I ran a garden pottery import business from 2000 to 2008 and kept a close watch on the industry, particularly its leading retailers. A rhetorical question I heard during all these years asked, “when is Smith & Hawken going to make money?” With the retail chain now in liquidation, its website down and 56 stores in various stages of being emptied out, the question I’m tackling here is “what lessons can we learn from Smith & Hawken?” Most autopsies blame the down economy and the having the wrong owners, but I think these miss a larger context and some lessons.

A Brilliant Start Creates a Niche
Friends Dave Smith and Paul Hawken started business in the late 1970’s as a different kind of catalog, soon supported by a single store. It was different because of what it sold, elegant and indestructible garden tools, and moreover it was different in how it sold. The founders initially mailed very few catalogs and built their list in-house, off responses from small ads in the back sections of gardening magazines. Their products were shown respectfully and in the context of a beautifully articulated philosophy of sustainability that Paul Hawken would soon expand upon with a series of books, the first of which, Growing a Business, spawned a PBS series.

Having established success selling garden tools, the company expanded into clothing, and ultimately this led to its downfall. While it enjoyed considerable sales growth (from $30 million in 1987 to $55 million in 1991) and beefed-up its management, profits proved elusive. The desire for growth and the route chosen to achieve them signaled the end of Smith & Hawken.

A New Owner, then Another, then Another
The ultimate direction downward must not have initially seemed so as Smith & Hawken was first sold to a benevolent buyer, the CML Group. CML was run by a pair of former Harvard University professors turned conglomerate titans who had started 20 years earlier with innovative ideas to run newly-acquired businesses with minimum corporate interference. The pair set out targeting the upscale leisure-activity demographic and began with the purchase of a small chain of ski stores and a boat manufacturer. Though they had some ups and downs, overall CML prospered. In the years leading up to its Smith & Hawken acquisition, however, CML had grown to the point where it had become a takeover target. To retain control, management shed divisions and piled on debt and then became overly-reliant on one acquisition – the faddish Nordic Trak. Smith & Hawken wasn’t bought by the idealistic CML of its early years – it was bought by a beleaguered CML, that within the span of less than 6 years entered Chapter 11 bankruptcy with Smith & Hawken as its only remaining asset.

CML expanded Smith & Hawken from 2 to 25 stores and incorporated the more advanced business backend of The Nature Company, which it also owned. It seems, however, that the staff was a poor fit for the expansion. One insider reported to me that most of Smith & Hawken’s retained employees had little interest in the new stores; they were Marin County-centric gardeners. At the time of CML’s bankruptcy the Smith & Hawken chain reported profits of $2.8 million on $88 million in sales — but growth was fueled by debt, some $25 million by the end of CML’s run.

DDJ Capital Management didn’t so much buy Smith & Hawken as it bought the distressed bank debt of CML. DDJ President Dave Breazzano told me that S&H had the culture of a non-profit. “They wanted the biggest, best and most expensive shovels,” without considering the economics. DDJ set out to change the culture, and improve the company’s cost structure and management. With its 2004 sale to Scotts for $58 million plus $14 million in assumed debt DDJ “made a little money”.

Private equity firms like DDJ are neutral on matters of corporate philosophy and do not look to hold and operate the businesses they acquire. Though he initially thought a specialty retailer like The Sharper Image or Brookstone would ultimately purchase Smith & Hawken, when it came time to shop the company, Scotts offered the most money. Breazzano says he didn’t doubt Scott’s intention to move to higher end brands, and says he “hasn’t looked back” since the sale.

Many others, however, didn’t look at the sale to Scotts with the same dispassion. Scotts is the largest and most profitable company in the USA dealing in poisons for the home garden. If this transaction proved anything it proved that the sustainable niche the founders so beautifully carved out at the inception was long gone. To the founders, and to long time supporters, Scotts was a terrible buyer. The Marin Independent Journal quoted Dave Smith as saying he suggesting a boycott of the firm still bearing his name while Paul Hawken said “Scotts couldn’t have been a worse corporate owner” and called the company “just a ghost of itself”. It had become all about the money and with the economy failing, the ill-fitting retail chain, now a drag on its corporate parents’ stock price, had to go. The liquidation was announced in July 2009 and Wall Street rejoiced at the expected earnings benefit: 15 cents a share in fiscal 2010.

What lessons might we draw from this historical overview?

Growing a Special Business
The further a business is from a widget the less likely it can scale in a plain vanilla manner. Smith & Hawken was not created with a cookie cutter and would not grow sustainably with a cookie cutter approach. As it grew, Smith & Hawken needed additional equity and did it on its own terms. Paul Hawken wrote about this in Growing a Business. “Smith & Hawken has been able to raise nearly $5 million without selling to a venture capital fund, going public or paying someone else to do it.” He writes about seeking patient money and keeping investors informed. Still it seems that no matter its type or how carefully vetted, even though they are “good guys” and it’s their “personal money” for a “good cause”, outside capital fuels an increased and unceasing need for growth and a focus on ROI that affects a special business’ mission.

Suppliers Need Help
Smith & Hawken made its name selling hand-forged gardening tools: shovels, rakes, hose, cultivators, forks, spades, trowels, sickles, shears and pruners. The small businesses that were their suppliers produced quality goods precisely because they were not mass production. To satisfy a growing demand required in many cases to knock off the originals. This is not necessarily a bad thing – it can be done in collaboration with the makers and extend their brands. It can also be done poorly, more in keeping with the public perception of a knock-off. Upon its sale to DDJ, S&H President Kathy Tierney made this point to the media, saying that smaller vendors don’t have the ability to supply all the chain’s stores. “You have to make the capital investments to do it well,” she said.

Perception vs Reality
At some point (I’m not sure when) the focus at S&H shifted from “authentic value” to “perceived value”. The potter Guy Wolff was Smith & Hawken’s most well-known name during much of its run precisely because he embodied the founders’ vision of honesty and integrity. Wolff’s distain for “perceived value” struck to the core of the brand. At Mill Valley headquarters old timers, initially attracted by the founders’ vision, were replaced by newcomers, recruited for their experience in creating perceived value.

Niches Need to Find Their Own Paths
Through the 90’s and into the present century the retail landscape became very competitive as higher quality goods became increasingly found in mass retailers and online. Corporate owners tend to see the road toward growth as One Way and the markets interpret deviations as weakness, rather than thoughtful tacking. For niche businesses the standard corporate approach to scale — more stores in more malls, more safe and conventional, less cutting edge — destroys value. It is exactly the wrong direction. This approach wouldn’t be possible without additional money — lots of money. A little poverty slows things down and forces close examination of major decisions.

Wrong Real Estate
Real estate often makes or breaks a retail chain and growth requires available real estate. Smith & Hawken often occupied very prime spots, in the best neighborhoods and malls. These spaces are not only expensive, they are also indoors. Without earth, what garden store could survive? Instead of upscale malls they might have invested in small stand-alone stores with land (see my other post about reclaimed gas stations).

What other directions might the company have taken?
It might have become what the Garden Centers of America is becoming — a loose knit group of premier garden centers scattered across the USA. GCA focuses on improving operations and networking between owners, but also pools buying expertise and volume. Acquisition of independent garden centers is the direction Urban Outfitters has taken with its new Terrain brand.. A growing Smith & Hawken might have been at the forefront of promoting sustainability in these stores.

A related notion is that Smith & Hawken might have more fully developed its store in a store business. So many independent garden centers do an awful job with home decor and the outdoor room that there is an opportunity for them to outsource this and focus on running their core live goods business. S&H had starts and stops pushing this idea but didn’t commit for any length of time but that wasn’t for a lack of market need and interest. A clear and believable long term commitment would be the only way an idea like this would gain ground.

Licensing efforts might have been less aggressive. Cannibalizing its brand at Target brought some scale to its licensing efforts, but at too much cost, especially given that S&H’s own offerings had lost authenticity and become less special.

It might have kept cool. The founders started cool. At the outset Smith & Hawken was at the center of the sustainable movement. Today all things are green. The idea is central to what is cool in 2009. But S&H was also upscale and that direction, ladies in pearls, lunching and shopping, became their focus. These were people whose library cards were buried underneath their credit cards. Mothers (and grandmothers) in jeans, carrying yoga mats or reading books and eating lower on the food chain could have been their focus. They could have directed efforts toward community and been really cool.

They might have stayed small(ish). They might have sold to a family business or employees or vendors instead of a failing conglomerate. Where are Smith & Hawken’s original vendors; the businesses that made the hand forged tools? Do they still exist or have they vanished? Was the value they offered too real for the perceptions of modern business? Had the right people and less money been involved all along, this article might have a celebration of the smart moves of a smart and nimble company, instead of the 40%-off deals now available on waterproof large screen televisions at a sadly shuttered chain.