The California Drought Could Make This Company a Big Winner

By Markets Fool.com

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With California's drought in its fourth year and lawns going brown, "drought shaming," or publicly exposing those who still have green lawns is a growing trend. Photo: Kevin Cortopassi, Flickr.

The California drought of 1974-1977 is remembered as one of the worst ever experienced and is used by the state as a benchmark for calculating extreme dryness. Yet the current drought that began in 2011 has accumulated even less precipitation over a three-year period than the 45 inches that fell nearly four decades ago.

And despite being best-known for helping homeowners maintain vast expanses of water-sucking carpets of green, Scotts Miracle-Gro says it's relishing the opportunity the drought is giving it, because it has a way to maximize the effectiveness of every raindrop that does fall.

Water, water everywhere and not a drop to drink
The lawn care specialist seems ready to make the best out of a bad situation. The arid conditions have resulted in California issuing mandatory water restrictions for the first time in history while also threatening substantial fines for violators in an attempt to cut water usage by 25%. The irony of California being a coastal state with the Pacific Ocean lapping its shores has many considering fast-tracking the construction of more desalination plants to convert the salty brine into usable water.

Because such plants are still in the distant future, the state is also encouraging homeowners to reduce the size of their lawns. For example, last November, Los Angeles increased by 25% the rebate available to get people to replace grass with water-sipping plants.

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Residents in the San Francisco Bay area and Long Beach have similar rebates, andSanta Rosa is paying residents to reduce the equivalent of 52 football fields' worth of lawn.There are more than two dozen water agencies across the state offering some sort of "cash for grass" program to homeowners.

While that would intuitively seem to be a problem for a lawn care company, Scotts CEO Jim Hagedorn has said "we actually see more opportunity for us in California than we do challenges," no doubt in part because the state just gave it regulatory approval to sell a new product that assists in water conservation.

New surfactant technology from Scotts Miracle-Gro promises to make water conservation easier in California. Photo: Scotts Miracle-Gro.

A wet blanket
EveryDrop is a wetting agent and water maximizer that allows water to evenly spread out over hard, dry soil and more readily permeate the ground. It uses surfactant technology, or compounds that help lower surface tension between the water and ground, to allow the water to be more easily absorbed.

Soil that has dried out doesn't let water penetrate the shell, but instead beads up, puddles, and otherwise runs off. However, as Scotts explains on thenew website it specifically developed for the California drought, by applying EveryDrop to the soil, water can get down to the plant's root zone more quickly, meaning less water is wasted.

Think of it as soap, which itself is a surfactant, being able to cut through the water-repelling properties of grease. In fact, many people have been using baby shampoo on their lawns for years as a low-cost substitute for the surfactants that commercial landscapers and golf courses regularly employ. The innovation of Scotts EveryDrop is that it will make that same technology widely available at the consumer level.

With lawns turning brown all across California because homeowners are limited to watering them just once a week, every drop of water applied is precious. So Scotts sees EveryDrop gaining a lot of traction quickly because it claims that homeowners can use up to 40% less water yet still have the same kind of lawn.

Saving grace
Maybe there's a bigger market in water conservation for Scottsthan in lawn care, at least in California, where the green stuff comprises just 15% of its business in the state. Garden and lawn soils, peat, and other growing media are the company's biggest lines of business there, just as they are nationally. Scotts generated 36% of its $2.8 billion in net sales from growing media last year, surpassing lawn care for the first time.

With regulatory approval for EveryDrop now granted in California, Scotts will have the product hitting store shelves this August, with other states to follow as they give the wetting agent the nod. Scotts anticipates that process to occur no later than next spring.

It perhaps can't come soon enough. California's State Water Resources Control Board just reported that residents reduced their usage in April by 13.5% compared to the same month in the benchmark year of 2013. As significant as that drop sounds, and as difficult as it's been on residents to do so, it means they need to almost double their efforts to reduce consumption by 25% as the state mandates.

Desalination plants are the sexy investment angle now because of their big-ticket price tags. A more mundane solution that allows every drop of water that hits the ground to penetrate it may actually do more to alleviate the crisis and generate a profit for Scotts Miracle-Gro at the same time.

The article The California Drought Could Make This Company a Big Winner originally appeared on Fool.com.

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