So Scotts Miracle-Gro (SMG), the stodgy, 139-year old lawn chemicals company that has annual revenues of $2.7 billion and an approximate 59% share in the plant food market, has decided it needs to place a lawsuit against TerraCycle, a three-year old, $1.5-million start-up that is not even profitable. Cited reasons include that TerraCycle's packaging is too similar and that TerraCycle is falsely claiming that its products are superior to its competitors, including Scotts.
In response, TerraCycle has set up a website to rally for public support against the lawn industry titan, with a "David vs. Goliath" theme. If TerraCycle loses this case, the resulting costs incurred could be crippling.
But what is Scotts so afraid of? TerraCycle's products, next generation lawn fertilizer made from 100% organic material (e.g. worm droppings!), are now sold in traditional retail outlets such as Wal-Mart (WMT) and Home Depot (HD), on the same shelf as Scotts' products. Scotts claims that a customer may think s/he is picking up a Scotts product, after being confused by a similar-looking package. At this point, does this pose that much of a threat to its 59% market share?!?
If Scotts wins, its only tangible accomplishment would be that it successfully thwarted progress. Scotts may win a few million bucks, but to a large company with a lot of analyst coverage, frivolous lawsuits simply cannot supplant innovation as a revenue source. It is unclear how analysts will react to this lawsuit as it plays out. Truthfully, in comparison to all else that Scotts has going on, it will probably not get much coverage. But if Scotts is fearing loss of market share, it may make more business sense to simply buy out its competitor. Given how small TerraCycle is, the litigation costs would equal a good chunk of the acquisition costs. And if conjoined, Scotts would potentially have an innovative product to complement its own strong brand.
Regardless, although this is a small-scale lawsuit for Scotts, it is not great publicity, even if Scotts comes out on top. What we could see brewing here is the 2007 version of Michael Nifong v. Duke Lacrosse — egregious claims that made national headlines, but ended up being nothing more than a house of cards that forever altered the lives of three young men, and destroyed Mr. Nifong's career. While I don't see the Scotts brand crumbling down as a result, the company still doesn't have much to gain by pursuing this lawsuit.
At the same time, should TerraCycle win this case and push forward, they can use this experience to their advantage. There have been instances when corporations have gone through hardships and used the results as a branding opportunity. One of my favorite examples involves the lengthy feud between the World Wildlife Foundation and the World Wrestling Federation, as to who would have the rights to the "WWF" logo. The World Wildlife Foundation eventually won, but Chairman Vince McMahon changed his company's name to World Wrestling Entertainment (WWE) and temporarily changed its slogan to "WWE: Get the F Out". Although the company's long-standing logo was lost, its cutting edge, maverick image was not…in fact, it was enhanced.
I am intrigued to see how this case pans out…and am hoping TerraCycle emerges "scott-free".
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Disclosure and Confessions: I do not own any of the aforementioned stocks, as they are not within the sectors I pay the most attention to. I fervently root for North Carolina over Duke in any sporting event, but I respect Duke and its winning tradition.