Morning, everyone. Sorry for the late start this morning. Looks like we're on New York time. Good morning. As I look around the room, I see a lot of familiar faces, see a lot of new faces as well. Let me take a moment to introduce myself if I haven't met you yet. My name is Jim King, and I'm the Senior Vice President of Investor Relations and Corporate Affairs at Scotts Miracle-Gro. On behalf of the entire management team, I want to welcome you to our 2012 Analyst Day. Whether you're joining us here in person or via webcast, I hope you're going to come away from this meeting with a better understanding of our company and where we're headed.
Before I go any further, let me go ahead and meet our legal obligations and remind you that our comments today will indeed contain forward-looking statements and that we recognize that our actual results could differ materially from what we discuss here today. We encourage you to read our Form 10-K, which we file with the Securities and Exchange Commission. With that, let me move on to the business of the day and try to set your expectations. I'm going to finish up here in a moment, and then I'm going to turn the stage over to Jim Hagedorn, our Chairman and CEO. For those of you who are new to the company, Jim is just now completing his 10th year as CEO and joined the company after merging his family's business, Miracle-Gro, with the Scotts Company in 1995.
Jim ran the North American business for the combined company until he was named CEO. He's going to provide some comments related to our strategic plan. About 30 minutes into his discussion, he's going to be joined by Dave Evans. Dave has been with Scotts Miracle-Gro for 17 years and was named CFO five years ago. About this time last year, Dave's responsibilities were expanded to include oversight of our strategic planning organization. Dave will discuss our five-year financial goals and objectives and then turn the stage back over to Jim. Following Jim Hagedorn will be our next speaker, Jim Lyski, who joined us about this time last year as Chief Marketing Officer. That's a role he's also held at Nationwide Insurance as well as Cigna. Earlier in Jim's career, he was in a marketing leadership role at FedEx.
He's going to discuss some of the major changes we've made to our marketing organization in the past year and is also going to show you some of the new advertising campaigns that are going to launch in the weeks ahead. Dave's going to be followed or Jim's going to be followed by Dave Swihart. Dave's a 22-year veteran of Scotts and is now Senior Vice President of our Global Supply Chain. He's going to speak briefly about the steps we're taking to manage costs out of the business and also share comments about the current commodity environment. After Dave, our next speaker will be our President and Chief Operating Officer, Barry Sanders, who's going to begin to pull everything together. Barry will be more detailed in reinforcing some of the specific growth initiatives and tell you the steps that we're taking to capture that growth.
Barry has been President for a little more than a year and was named Chief Operating Officer just a few weeks ago. He's been at Scotts for 11 years and has led our IT group, our sales force, Supply Chain, and most recently ran the North American consumer business. Now, after Barry's complete, we're going to take a break for lunch. After lunch, Dave Evans is going to come back onto the podium about midway through and discuss more details around our 2012 outlook and guidance. After Dave is finished, the entire management team is going to come back up onto the stage and take Q&A. For those of you who are listening via webcast, I would tell you to plan about a 30-minute gap between the start of lunch and the Q&A session.
Also, I wanted to point out that seated at each of your tables this morning is a member of our management team, I think, with the exception of a couple of tables in the back. Let me take a moment to introduce the other members of the team who aren't speaking this morning. You guys just raise your hand when I call on you. Mike Lukemire, President of our U.S. regions. Mike Carbonara, who's President of the Northern region in the U.S. Brian Kiera is here. Brian's President of our Business Development teams in the U.S. Bruce Caldwell, Senior Vice President of R&D. Jim Gimeson, who's recently named Senior Vice President of Strategy. Randy Coleman, Senior Vice President of Finance. Peter Korda is here. Peter is Senior Vice President, runs our Scotts LawnService business. Mark Weaver, Treasurer, is here this morning.
Todd Moore, Vice President of Global Procurement, is there in the back. Rich Foster, Vice President of Marketing, is back there as well. Also with us this morning are a couple of members of our board. They are Kate Littlefield Hagedorn, who's here this morning, as well as Nancy Mistretta. As I said earlier, I think you're going to find it to be time well spent. To get things moving this morning, I'm going to turn the stage over to Jim Hagedorn.
This thing works. Okay. I'm walking over here this morning and it looks like a doorman dude or something, but he's got this huge thing of like roses. He's got a big smile on his face. I'm like, "Fuck, Valentine's Day." My wife is here for the first time. Love you, dear. Happy Valentine's Day. Good morning, everyone. Excuse me. I don't know how many times, I don't know how many years I've been doing this, but it's good to be back in New York. I think we figure it's easier to catch you guys if we come to you instead of say, "Let's go to Florida," although Florida has been super fine weather and the business is looking great down there.
People are saying to me, "God, it looks like you guys have some spring in your step and you know you're acting like things were okay," considering last fall you were acting like it was really grim. I was like, "Dude, you know we're all in this boat." When you're not like winning the battle, you know it's one of those things where you got to wait till the next series of events to say, "How's it going?" Luckily, so far, it's looking pretty good. Today, I'm feeling, I got to say, pretty good. Why? You know I'm going to talk about it and I got prepared comments. The reason for that is to sort of, I got a lot of things to say and I want to make sure I get to them all in kind of an efficient amount of time.
The biggest thing is that, and I'm going to say it, which is 2011 really had a silver lining for us. It's really caused us to sort of take a hard look at the business. As a result of that, the management team, you know a lot of the stuff that I kind of utter and hope catches on has. It just goes back to sort of Horace Hagedorn, Miracle-Gro stuff, which is advertising works, drive our brands. It's all about the consumer. You're going to hear that pretty much from everybody. There's a lot of opportunity and we're really focused on, I think, driving growth in the business, not at any cost, but growth in the business. We're going to spend a lot of time, and I think it's actually a pretty exciting couple of hours we're going to spend together.
You know Miracle-Gro is a private company, but we have board meetings. My old man would say, "You know, Jim, the good thing about like having these board meetings is it really gets everybody's head together about sort of our strategy and how we're driving the business forward." I think more than anything, this event and 11 have really sort of driven us together to really try to be pretty careful about how we think about the business, what we think the levers to drive it are. That's what you're going to hear from us today. I think it's pretty cool. We'll have lunch and then we'll talk about it if people have questions. The first thing we're going to start with this morning is a video that really is about what I think is our most powerful brand, Miracle-Gro, and kind of what we think Miracle-Gro stands for.
We'll run that and then I'll get up there I got like 25 pages of script I need to go through and then I'll hand it off to Jim Lyski. Let's watch that video. Man, I love that. Every single clip in that film says something about the relationship that consumers have with the garden, whether they're planting flowers, grass, vegetables, herbs, from community gardens and backyards in Middle America to a balcony or rooftop in New York, from seniors to little kids, our business touches them in lots of ways. Our job is to grow the business by reaching all those consumers. We know that today's consumer is a moving target. How they receive their information is different. How they value and use their free time is different. How they feel about issues like sustainability and the environment is different.
We told you guys three years ago that we were changing our business model, that we were moving away from being retailer-centric and moving toward being consumer-centric. To do that, we outlined three major initiatives: our plans to regionalize the business, our plans to focus on more consumer-driven innovation, and our changes to the way we market to consumers. We believe that these initiatives, all of which we'll talk about over the next three hours, would allow us to evolve our business. They would allow us to move from simply being a world-class supplier to being a true world-class consumer goods company. Last year, we reiterated that strategy. We also told you we branded this initiative internally, and we called it Consumer First. We were working to ensure the entire organization was focused on one common goal. How are we doing? Pretty good, actually.
As weird as it may sound, 2011 was a productive year for us, a pretty good year. Now, if all you do is look at the P&L, it clearly was a shitty year. Whether it was the weather, commodities, or the macro environment, everything seemed to work against us at the same time. We called that our earnings, and 2011 left us in a position of having to reset our long-term financial goals. As we exited 2011, we did so as a much better company and a smarter company. We entered 2012 committed to our strategy, and we're making good strides in executing it. Since this meeting last year, we've hired a new Chief Marketing Officer, Jim Lyski, who's begun to reshape the marketing team and its efforts. We've modified our thinking about innovation. We know that some consumers will continue to trade up the value chain to better products.
Today, you'll see several examples of these products coming to the market in 2012 based on that reality. We also know that some consumers can't afford to do so. Our research tells us that they still want to use our brands. We began over the last year in R&D, marketing, and the supply chain on finding ways to innovate by taking costs out of the products. By doing so, we're confident we can keep more consumers engaged and probably even invite more consumers into the category. In 2011, we also made some refinements to our regionalization model and the team running it. I want to be clear, we are committed to regionalization. If some of you have interpreted comments we've made in the past to draw a different conclusion, I want to set the record straight. Regionalization remains critical to our long-term growth.
Clearly, like all companies, we're a learning organization. The changes we made are good changes, and as you'll hear from Barry, should make us even more effective in the years ahead. In 2011, we also streamlined our management ranks, removing an entire layer of management in several parts of the organization. We're in a better position today to make faster decisions and better decisions. We've also reduced our overhead structure, which should save us as much as $20 million this year. What else did we do? We completed the process of transforming our capital structure and clearly outlined our views on leverage and uses of cash. We put a new financing structure in place that should take us through the next five years. Finally, we decided to accelerate the execution of the strategy. We're increasing our media this year by $40 million.
Jim Lyski is going to help you understand how we got to that number, what we're going to do with the money, and why we believe we're going to be successful. I want to be clear how we're measuring success. Do I expect that that level of investment to help drive the category this year? Of course. I'm not sure I can tell you, nor Jim or anyone else, precisely what the return on that investment will be in 2012. This is part of our longer-term strategy to enhance the equity of our brands, to build relationships with the consumer. When I look at us entering 2012, I have no doubt we're a smarter company than we were at this meeting a year ago. We're more data-driven and more fact-based than we've been in a long time. We'll demonstrate a lot of these changes here this morning.
We'll also demonstrate that there's a lot of upside to the story as we look ahead. While I'm saying I feel good about where we are, I'm not saying just because I'm the CEO. Remember, our family owns 1/3 of the business, and we're the largest shareholder in the company. As both the CEO and the largest owner, these are questions I believe that you should be expecting us to answer today. Can we grow the category? Can we continue to capture share? Do our brands still have power with the consumer? Can we effectively manage the volatility in the commodity markets? Are we willing to use our financial strength for inorganic growth? Are we focused on the right performance metrics? Let me try to give you the answers. Yes, we're confident we can grow the category.
You'll hear some reasons from Jim and Barry this morning that I think will demonstrate that. Yes, we can continue to take share. In fact, we have share opportunities everywhere we operate. In the U.S., we can still gain share in every category. We can gain share in channels where we're underindexed. In Europe, the market share opportunities are even more obvious, and Barry will show you that. He'll also show you the share opportunities that exist for Scotts LawnService. Question three. Yes, our brands continue to have power with the consumer. Some people have assumed that our decision to be conservative on pricing this year somehow suggests we've lost confidence in our brands. Wrong. I'll come back to this myself, and you'll hear more about it throughout the meeting. Question four. Yes, we can effectively manage commodity risks.
In fact, this is an area where we just keep getting better. Nearly nine months ago, our purchasing team laid out their forecast for what they thought they'd see this year. Many of you were skeptical, but the reality so far has been almost exactly what they had predicted. You'll hear from Dave Swihart about that. Question five. Yes, we're willing to use our cash and flexibility to make acquisitions. What we've said is we'll use one-third of our cash for these purposes. We said we'll try to keep our leverage between two and two and a half times. We're not talking about transformational deals, but deals that should clearly leverage our existing strengths and add value. Question six. Yes, we're focused on the right metrics for success. You'll hear that in multiple ways today.
While we're pushing hard for growth, we're not looking for growth just for the sake of it. We're looking for growth that drives shareholder value. This brings me back to our performance in 2011. The issues that had the biggest impact in the year were pretty easy to identify. The easy approach would have been to blame those issues and to go on into 2012 without making any adjustments. Had we done that, our EPS would have been substantially higher than what we're guiding to today. We didn't take the easy approach. We wanted to make sure that something deeper wasn't occurring here. We took a hard look at our business and, frankly, a critical look. While we all walked away from the process feeling confident in the categories and our place in them, we also walked away a bit disappointed.
We knew we could have been more strategic in our decision-making. If I was being honest, I'd tell you we strayed from our plan in 2011. We fell back into the trap of taking money away from our brands and using it to fund retailer promotions. That's not going to happen again. We're putting our own money where our mouth is. We were transparent that we did not pay any bonuses last year. While we're budgeting for them this year, we aren't getting paid just for showing up. In our incentive plan, we're measuring four things: unit volume growth, market share growth, gross margin rate, and earnings, with the precise measures depending on where you reside within the business. We have never made unit volume growth and market share an incentive metric until today. This is where I come back to saying the growth won't be one-dimensional.
Starting this year, a substantial portion of our long-term compensation, which is paid in equity, will be based on hitting certain ROIC targets over a three-year period. Every associate who receives stock as part of their pay is on the same plan. The plan is designed for balance. We know that a short-term benefit this year could be an ROIC challenge for the next year if not managed correctly. We know that being overly conservative in planning for the long term can minimize our near-term results if not managed correctly. Striking that balance is critical. Every member of the management team has a stake in making sure we succeed. This is the biggest change to our pay structure in a long time. The changes we've made are clearly aligned with the interest of everyone in this room. The remaining question is pretty obvious. How are we going to do it?
Here is how. Through a long-term, or this is just a very two-pronged approach to innovation. By improving our communication with the consumer, by continuing to nurture strong relationships with our retail partners, and by expanding geographically. Let me touch on each of these. Barry Sanders and Jim Lyski, you are going to spend a lot of time going through the details, but let's talk a little bit about the environment. In the United States, in the categories in which we currently compete, household penetration is 50% or less in every single category. In lawn fertilizer, for example, it is 46%. There is a large untapped market out there to go after. What is even more attractive is that consumers who use our products today do not do so at the recommended levels. We believe we can change that.
Innovation will be part of that answer. You are going to hear more about Snap, our new lawn care system, which, for instance, it is all over the place out here right there, and why it is such a big opportunity. Over the next several years, we believe Snap will begin to transform the way people take care of their lawns. If we are successful, we expect to bring a new group of consumers into the category. We expect the broader reach of Expand 'n Gro this year to do the same for the growing media business. We are also confident in some of the changes we have made to the Ortho line, which are designed to make pest control easier for consumers. As I said earlier, we are taking a two-pronged approach here. It is hard to say.
You'll hear several members of the team talk about the value equation in their presentations. We don't want cool products just because they're cool. If innovation doesn't add value to the consumer, we should eliminate it and reduce the cost. That, I'm convinced, will make the category even more accessible to more consumers. Making the category more accessible and relevant will also factor into our approach with communicating with consumers. Our research tells us that all demographic groups are interested in lawn and garden. Whether young or old, they're often not sure of what to do or where to go for help. We know that we're reaching a smaller percent of these consumers by using traditional TV. 2012 will mark our biggest move yet into social media and digital, though admittedly, we're still scratching the surface. This year will also mark our biggest move in targeting Hispanic consumers.
They, too, are highly interested in the lawn and garden category. We started down the path of directly targeting Hispanic consumers a couple of years ago, but we'll be even more aggressive this year. Everyone's aware of the demographic shift occurring in the United States, so it's critical we succeed at this. While our focus is clearly shifting to the consumer, we remain focused and committed to our retail partners. In case there's any doubt, they remain highly supportive of the lawn and garden category and of us. I was personally engaged in the off-season talking to the CEOs of several of our biggest retail partners. They were actively engaged in talking to us. In fact, our main point of contact at Home Depot, Lowe's, and Walmart all participated in our annual sales conference this year.
We've been having this meeting for a long time, and it's the first time we could get all three of our major retailers to attend in person. The message they delivered was loud and clear. First, they support lawn and garden. Second, they recognize that as the category leader, they need us to drive growth. I'm confident you'll begin to see that in the weeks ahead. We have some of the most valuable real estate in the stores this year, real estate that we haven't had in the past, and real estate that we believe will help drive the business forward. I'm confident in our 2012 prospects and remain convinced that we can drive strong top-line growth. In fact, I want to detour just for a minute and talk about what we're already seeing so far this season.
Since the beginning of January, when the lawn and garden season starts to break in the southern markets, company-wide POS is up more than 20%. In Florida, it's up more than 25%. We're already about one quarter of the way through the season in Florida, so it's starting to feel like a trend. Consumer traffic is noticeably higher, and we're seeing strong support in every category. In Texas, it's been the same story. We're up more than 50% since the beginning of the year. Last year, Texas was dead due to drought. They've had some rain in recent weeks, and consumers almost immediately re-engaged. In Southern California, we're essentially in line with last year, but in neighboring Arizona, POS is up more than 100%. These are early results, but they reinforce what we said in the past. This is a category that consumers love. It's resilient.
We're confident we can grow when we don't have extreme weather events like we saw last year. Now, let's get back to the future and talk about the opportunities outside of the U.S. consumer business. It's too early to see meaningful results out of Europe for 2012, but that doesn't mean we're not thinking a lot about the business. Those of you who followed us for a long time know that it's taken us a couple of years to get our footing in this business. A few years back, we laid down a challenge to the international team. We told them they had to grow in line with the rest of the business and to return their cost to capital. They're doing that. As you'll hear from Barry Sanders, the international team not only has turned things around, but they're providing some important insights for the U.S. business.
This is especially important in categories like naturals and organics. What's the outcome of this? We're going to look and sound more like a global company. There are significant opportunities to grow in Central Europe, especially in Germany. We're beginning to pursue those. We're also optimistic about the long-term potential of the Miracle-Gro brand in China. 2012 will be our first full year in that market. We know that indoor and patio gardening is an important part of the culture, and we know that our brand plays well there. We're going to take a slow approach, but we definitely like the opportunity. Barry Sanders is also going to provide a brief update on Scotts LawnService. We like SLS for two reasons. First, it allows us to lever the power of our brand.
Second, it allows us to have a relationship with the consumer regardless of how they participate in the category. Over the past three years, in a lousy SLS team has delivered rock-solid performance and is now delivering double-digit operating margins. We have been focused on the business model, not top-line growth. Now we believe we can start to focus on putting our capital to work in the lawn service side of the business as well as the pest control business. Both of these are multi-billion dollar categories. Remember, SLS is only a $250 million business. There is a lot of growth potential here. Innovation that focuses on all consumers, improved communications to consumers, alignment with our retail partners, and geographic expansion are all critical to our success. I want to come back and address another important issue: the power of our brands.
I'm going to be honest about this. I'm frustrated by the reaction I've heard from a lot of people on Wall Street based on our decision to forego any major price increase this year. Immediately, we began to hear questions about our pricing power and about whether our brands had become irrelevant with consumers. Let me provide some context on what's happening and what drove our pricing decisions for 2012. I'm going to start with this fact. With the exception of a little noise in 2011 due to some merchandising decisions and competitive issues in the grass seed business, our market share has been consistent over the last several years. In one industry after another, branded products have been losing out to private label. This is not true in lawn and garden. This isn't an issue about share. This is an issue about the category.
This chart about our lawn fertilizer business tells an important story. For competitive reasons, we've not put numbers in the slides. On the left, you'll see the story of pricing. Year-after-year, we've taken price increases, and our sales and profitability have increased. On the right, you'll see what's happening with unit buying. Clearly, we have been focused on maximizing the financial performance of this category, but not focused enough on consumer participation. Remember, we haven't lost share in this category. In fact, over the period, we've gained share. The category shrunk over that same period. Our research tells us more people are moving in and out of the category with a higher degree of frequency. There are two reasons. First, they don't think they need the fertilizer. They're telling us their lawns look good enough. The other reason they're moving in and out is because of the cost.
The average price to the consumer for a bag of fertilizer has increased 56% over the past five years, while the consumer perceived benefits have not changed. If a consumer thinks their lawn looks good enough, why spend the extra dough? However, when they do spend the money, they're still buying our brands. Re-energizing the lawn fertilizer business is a major, maybe the major focus for 2012. Jim Lyski will discuss this in more detail. We're changing our messaging. We need to make sure the consumers understand why they need our products. We're not going to let pricing get in the way. The steps we're taking in 2012 aren't a result of a new strategy. Our decisions are based precisely on the strategy that we've outlined in the past: put the consumer first. How does this impact our margins in 2012? Do I like the answer?
The answer is no, I don't like the answer. Is it the right decision? I have no hesitation in telling you that the answer is yes. I have total confidence in telling you that the decision has nothing to do with the health of our brands. What does it mean for pricing in the future? It means two things. First, pricing has to be a critical tool in offsetting commodity inflation. While we took a conservative approach to using that tool in 2012, that does not mean we'll take the same approach next year. Secondly, pricing will be particularly important as a strategic tool. Dave Evans, his strategy team, and the business operators are really digging into this. They're leading an effort to re-examine our trade programs and to re-examine the way we price the entire product line.
When you look at the entire line, you see opportunities to reduce the price of certain products and to make them more appealing. You also see examples of where pricing is too low. For obvious reasons, I'm not going to give you examples of them today. Let me be clear in saying that pricing will be a part of our growth strategy as we move ahead. I've used the word strategy several times here in the last few minutes. Let me make sure I'm being clear about some things. We're not changing our strategy. We just need to deeply commit to implementing our strategy and to do it with passion. I'm the CEO, so the buck stops with me. I told you we took a hard look at our business over the past summer. In that process, I looked at what we could have done differently.
As I said, we fell back into some of our old habits. I'll take the blame for that. I'll also tell you that I've personally taken steps to prevent it from happening again. I've never been a big believer in things like vision statements and mission statements. When our business struggled last year, our morale went out with it. I got to be honest, I wasn't that worried about what you all thought about whether we had abandoned our strategy. I was more worried about whether our associates were worried if we had abandoned the strategy. I laid out a series of communications to our organization that I want to share with all of you.
To me, it provides the context of why we believe we can continue to grow this business with differentiated products that resonate with the consumers and why we're confident in delivering the type of growth that will drive shareholder value. I want to start by talking about the brands. We know we have some of the strongest brands in the world. What is a brand anyway? To me, the foundation of all great brands lies in a simple concept. It's a promise. What is our promise? I didn't show you that video at the beginning for entertainment. I showed you because that is our business. Our promise is not to make the world's best fertilizer for plant food. It's not to have the best active ingredients in our control products.
We promise consumers that we will help them create and enjoy an outdoor space where they can celebrate with their friends and family, play with their kids, play with their dogs, and grow beautiful gardens. Given that promise, this fall, I wrote the following vision statement for our company and shared it with our associates. Our vision is to enable people of all ages to express themselves on their piece of the earth. That may sound a bit flowery for a dude who flew F-16s. Again, let's go back to that video. We don't care if someone's garden is a showcase in a wealthy suburb or it's a single potted plant on a fire escape. We don't care if a consumer wants a perfectly manicured lawn or is willing to live with a few weeds.
We don't care whether a consumer has decades of experience or is a six-year-old planting a seed for the first time. All of these people are gardeners, and all of them are our consumers. Our business is all about serving them. But I also know we have other stakeholders, and that includes the folks in this room. Knowing that, I wrote a broader mission statement as well. Scotts Miracle-Gro is committed to helping consumers around the world by providing them with innovative solutions to create beautiful and healthy lawns and gardens. We will be responsible stewards of our planet. We will provide a dynamic workplace for our associates to succeed and grow their careers. In return, we will be rewarded with an improved market presence and profitable growth that enhances shareholder value. What do these things have to do with this meeting? Everything.
When you're implementing major changes, it's easy to revert to your old habits when you hit a bump in the road. That's part of what happened in 2011. We can't allow that to happen again. We know that. The creation of a new vision and mission statement provides some high-level guardrails for us, and they support our category. What do we mean when we say we want to be consumer-first? What do we get for it? What do you get for it? Our strategy is to create a world-class consumer products and service company, to leverage our relationship with the consumers, to leverage our unparalleled advantage of scale and innovation. If we do this, we can expand the lawn and garden category globally and enhance our market share. What do we get for that?
Within five years, we believe the strategy can deliver total revenue of $4 billion and operating income of $600 million. That's not a goal we've shared with you in the past. In previous meetings, we've talked about our long-term goals. Dave called it our CFO plan. Obviously, we had to revisit those goals after 2011. Internally, we're calling these new long-term goals our 456 Plan. That is $4 billion in sales in five years, resulting in $600 million of operating income. This isn't a layup. To hit these targets, we're going to have to be firing on all cylinders. We're probably going to need some growth from acquisitions and partnerships. Remember what I said earlier about how we're paying ourselves. We're not simply going to chase revenue.
We're looking for the right kind of growth, the kind that drives economic value, which in turn should drive our equity value as well. There are certain assumptions built into the 456 Plan that I want to make sure you guys understand. Rather than me explain them, I'm going to turn the stage over to Dave for about 20 minutes, and he'll share more of the details.
Thanks, Jim. Good morning, everybody. Before I start, I'd like to welcome everyone to our annual Analyst Day. It's good to be back in New York. As Jim King said, I've been CFO for five years now at Scotts Miracle-Gro. Interacting with the investment community is one of the things I enjoy the most.
I'm happy to be up here this morning, and I hope to get a chance to speak to as many of you as possible before the end of the day. Let's talk about 456. As Jim just said, the concept is pretty simple. I want to be transparent at the outset. Jim referenced what we used to call the CFO plan. For those of you who have attended these meetings in the past, you'll recall that the CFO plan was the five-year plan I laid out two years ago in Florida. There are several key differences, though, between the CFO plan and 456. The first is the endpoint, now 2016. The second is the 456 plan assumes modest growth from acquisitions. It assumes commodity inflation at roughly double the rate of GDP growth. It assumes we'll continue to increase investment in our brands.
It requires us to increase leverage from pricing, trade programs, innovation, product costs, and SG&A. We've identified a number of initiatives that give us confidence in our ability to achieve our 456 plan. I'll get to those details in a few minutes. First, I want to share a few thoughts on what we've already heard from Jim. As Jim said, we have significant opportunities to grow this business in a way that creates long-term value for all of you. Those opportunities, plus the talented and passionate people I get to work with every day, are what keep me so excited about this business. Our results in 2011 were disappointing and that hurt, believe me. Many of us, including every member of the management team here, took it personally.
What I hope you've heard from us over the past several weeks, and will continue to hear today, is that we're now better positioned to grow over the next five years. That's an outcome of initiatives we've taken and progress we've made over these past 12 months. From the outside looking in, it may have seemed like we were simply plugging the dike all last year. We weren't. In fact, we've made tangible progress in several areas, including areas core to the corporate arena, areas that Jim and I are both responsible for. What are some examples of our progress? First, we're building new capabilities and leveraging data to drive insights that will improve the effectiveness of our strategy and initiatives. You'll hear that from Jim Lyski today. I also believe you'll see more confirmation of that from the entire team as we move forward.
Second, as you've just heard from Jim Hagedorn, we've increasingly aligned our associates around a more succinct articulation of our vision, mission, and strategy. I agree with Jim. We've already begun to see the impact these efforts are having with our people. Third, I'll reiterate what Jim has said for emphasis. In collaboration with our board, we've more clearly linked long-term compensation to execution of our strategy. As an outcome, we'll increasingly drive improved alignment among our leadership team. By using return on invested capital, ROIC, as a metric for long-term compensation for the entire leadership team, we've created a platform for increasing awareness of those activities that positively influence long-term value creation and those that don't. As CFO, this metric is a powerful tool in my toolkit. I intend to leverage it to continually improve our collective financial literacy and influence decisions we make.
I can tell you that already I'm seeing a healthy tension in discussions more so than in the past. The reason I believe is that we've increased clarity and alignment around our culture, our goals, and our metrics. We've more clearly established a framework for all of our leaders to navigate as they strike the balance between year and long-term performance that Jim mentioned a few minutes ago. A final measure of progress this past year I'd share, we've established a reestablished a long-term financial goal, 456. Yes, we really did come up with this independent of Herman Cain's 9-9-9. I believe this long-term goal strikes the right balance between aspiration and achievability. Over the past 12 months, we've executed a long-term financing structure to support the growth incumbent within 456, while also reducing risk by diversifying both our sources of credit and our debt maturities.
Consistent with our stated strategy and capital structure and uses of cash, we increased our dividend again last fall by 20%. Let me share a little bit more about the operating plan supporting 456. As Jim described, it's no layup. I'll start by stating some key assumptions underpinning the plan. To be clear, these are assumptions for the period 2013 through 2016. I'll provide more color on 2012 guidance at the end of the day. The long-term plan assumes, first, strong execution of prioritized initiatives by the operating team. Second, gradual but modest improvement in the global macroeconomic environment. Third, average annual commodity inflation of 6%-7 %. Fourth, advertising increasing an additional 100 basis points as a percentage of sales over the planned period. Finally, fifth, modest acquired growth, but within the construct of our stated strategy for capital structure and uses of cash.
That's a lot of assumptions, but I think they're all very reasonable. I also want to share with you that as we went on this journey, we spent more effort than in the past evaluating the impact of our external environment and how it's evolving to inform our strategy and initiatives. This includes consumer trends, competitive trends, regulatory trends, and the like. You'll see strong indications of that in Jim Lyski's brief. As a result, I'd say we took a very pragmatic approach and that the assumptions we're making are more realistic than what we baked in the original CFO plan in 2009. Speaking of pragmatism, let me address one risk that we've been unable to avoid since we met last year. We are fundamentally a weather-dependent seasonal business, currently predominantly concentrated within North America.
We recognize that average weather always includes unfavorable conditions in selected regions and at certain times. Our business model is readily flexible enough to shift resources and, to some extent, cut resources to mitigate the negative impacts of unfavorable regional weather conditions. However, in the event of a year where weather varies significantly from the norm across a broad swath of the country and over an extended portion of the season, like it did in 2011, we simply cannot overcome the stress that places on our short-term earnings and will not sacrifice the long-term to make a quarter or fiscal year. We took some learnings from 2011, and as Jim said, we don't intend to lose those. I could have easily built a bad weather year into our plan to be conservative. I'm not a weatherman.
As tempted as I was to invite Al Roker to stop by this morning for his five-year forecast, I decided not to do that either. Weather could get in our way from time to time. It could delay the outcome of this plan by a year. If you own Scotts Miracle-Gro shares, you already know that. There are two ways we've attempted to adjust the weather in our model. First, we're planning on doing better than 456 if weather doesn't get in the way. Second, as Barry will elaborate on, certain initiatives we have are intended to dampen the weather risk over the longer term through our focus on gaining increased share in underpenetrated regions, geographic expansion beyond North America, and channel expansion. What I would also share is that we're better equipped to take advantage of potential upside in the event of unusually favorable weather. Enough about weather.
Let me walk through the 456 goal in more detail. To achieve 456 requires average annual top-line growth of 7%- 8%. That's from a base of what we believe is achievable in 2012. The plan requires growing the bottom line at about double the pace of the top line. In part, that requires us to regain leverage lost since 2010. This results in an operating margin rate of 15% in 2015, or about 400 basis points higher than what we expect for 2012. To realize this growth in operating margin requires an increased focus by the management team on both gross margin rate expansion and SG&A productivity. Increasing this leverage is essential to creating the virtuous cycle of a highly branded, growth-oriented consumer goods company, enabling funding of areas required to maintain and extend long-term brand health and product differentiation, and more effectively leverage top-line growth for strong earnings.
While I see a clear path to achieve our plan, as I'll explain next, I also have no expectation that the market will embed these assumptions in our share valuation tomorrow. Our job is to give you confidence in management and the achievability of our plan. That requires consistently producing results in line with our goal. I told you that we took 2011 personally. I can assure you that the entire team recognizes that the results we deliver will speak volumes louder than the words we speak. What are the imperatives? The results we're aiming to produce from 2013 through 2016. If I start with the top-line growth, we believe our categories, including unit growth, pricing, and mix, can grow at an annual rate of 3%- 4.5%. We believe we can drive further share, equivalent to up to 1% incremental sales growth per year.
At the high end of our range, this would equate to about 50 basis points of market share growth per year. Barry will speak more to this, but our plan is to exceed this through our regionalization initiative. The combination of category and share growth sums to 3.5%- 5.5% average annual growth. For a historic perspective, sales growth for the preceding four-year period, 2007-2011, was at the low end of this range, averaging 3.5% per year. This was also in an extremely unfavorable economic environment and with historically poor weather in 2011. Growth of 3.5%- 5.5% leaves us short of our $4 billion goal. To address that, we're pursuing initiatives to close the gap with incremental opportunities of about $250 million, which equates to about 2% incremental growth on average per year.
These are opportunities where we believe we have a right to win by leveraging our unique competitive assets. Where is that growth going to come from? Later this morning, Barry will provide more color describing selected category, channel, and geographic expansion initiatives in our consumer business, as well as opportunities to leverage our unique assets to grow in service. Recall as well that the pricing realization initiative that Jim described, where we believe we have opportunities to drive growth by pricing more strategically. Moving to gross margin rate, this represents perhaps our greatest point of leverage. While we'll take a step backwards in 2012, which I'll provide more details on at the end of the day, we have plans to retake lost ground and drive at least 50 basis points of growth per year from 2013-2016.
These plans would return us to a gross margin rate of approximately 38%. I realize in the past that we stated an aspiration goal of 40%. That's still true. However, we'll need more initiatives and perhaps some help from commodities to hit that level by the end of this plan period. How do we regain positive momentum on gross margin rate? First, we've planned for average annual inflation of 6%-7% in commodities. As Jim discussed, we intend to find ways to offset the dollar value of those increases through a combination of innovation, improved trade program productivity, and direct pricing. This translates to an effective 1%-1.5% annual price increase. The impact of potential commodity inflation offset in dollars results in nearly 200 basis points of margin rate dilution over the four-year period.
On the positive side, we'll see a benefit of about 30 basis points in 2013 from the planned exit of our professional seed business. To grow margin rate to a level approximating 38% by 2016, we've identified three principal initiatives. Collectively, they have a cumulative value of about $150 million by 2016, and that's significant. What are these initiatives? First, we're actively evaluating strategic pricing opportunities. As Jim said, this is an initiative in which I'm personally and significantly involved. Without sharing details for competitive reasons, we're well into the process of identifying and evaluating potential options for next season. This isn't simply an academic exercise. We've recently created a new executive-level role for the sole purpose of providing leadership to this initiative and to form a nucleus around which we'll build a longer-term capability. I'm not viewing this as a one-year endeavor.
It's something we'll be building on for the next several years. Second, we'll continue to invest resources to support supply chain productivity initiatives. These have historically delivered $10 million- $15 million per year. Dave Swihart will speak to the principal areas he's focused on to sustain this pace of year-over-year savings. Finally, our third focus is on driving incremental cost out of our products. Jim Lyski will discuss how we think about managing the consumer's perceived value equation and our belief that there are costs embedded in our products without corresponding benefits. Dave Swihart will provide examples that help demonstrate the types of costs we believe can be cut without disrupting that value equation. Frankly, this hasn't been a focus of the organization in recent years. We believe this initiative represents an additional opportunity of $10 million- $15 million per year.
Moving on to SG&A, our plan is to limit its growth to 75%- 85% of sales growth. While this may seem modest, it assumes we continue to increase our advertising to sales ratio by about 100 basis points over the four years. This means we'll limit all of their SG&A to annual growth of about 3% per year. This requires new initiatives to reduce complexity, eliminate waste, and leverage technology to improve our efficiency. One example to illustrate this relates to our product innovation process. In 2011, we completed the implementation of a new tool in SAP. This tool, Product Lifecycle Management, a PLM, gives us a technology platform which we will optimize in future periods to better enable us to launch new products more efficiently, more quickly, and globally.
You'll see a demonstration of the value of this when Jim Lyski describes this year's more global launch of Snap. This innovation process, which we'll continue to streamline, is an important element to accelerating growth outside the U.S. We're identifying more initiatives just like this to drive increased leverage.
What does this all deliver? The analyzed goals for top-line growth, margin rate expansion, and SG&A leverage drive us to our ultimate goal of $600 million of operating income by 2016. This produces about $1.25 billion of operating cash flow over the four-year period 2013-2016. We target about $700 million- $800 million of cash to be reinvested on behalf of our shareholders for growth, organic and acquisitive. We would anticipate returning the balance plus cash resulting from maintaining constant debt leverage of 2x- 2.5x EBITDA to our shareholders. This all adds up to average annual share returns in the high teens delivered through a combination of earnings growth and dividend yield. It also yields average annual ROIC growth after 2012 of about 40 basis points. As I said earlier, on one hand, we see this as somewhat aspirational.
On the other hand, we also think it's highly achievable with our selected initiatives and focus. As I told you earlier, interacting with Wall Street is a part of my job that I really enjoy, in part because of the intellectual and analytical nature of the discussions I have with many of you. Because of that, I know that developing long-term plans like this is never easy. Some of you will tell me our plan is too conservative. Others might say it's a pipe dream. Whatever your view, I happen to believe that we have the initiatives, the people, and the talent to deliver our goal. I believe the assumptions and puts in our plan are reasonable. It's not my job to assign a value to our shares. I'll leave that to all of you.
If we execute successfully against our initiatives, many of which you'll hear through the rest of today, we will produce significant growth for our shareholders in coming years. Now, I hope you better understand why I'm so passionate about this business. With that, I'm going to turn it back over to Jim to continue the discussion.
Thanks, Dave. Well done. 456. It's definitely something that we can do, and we can probably do more than that. I want to make sure that everyone, that includes our investors, is on an equal footing on how we'll produce it. I'm not talking just about specific programs or financial models like Dave just outlined. When I was rewriting our vision, mission, and strategy statements this fall, it was all about providing a roadmap to our people. I wanted to make sure they always knew what we were trying to achieve and how. I also wanted to make sure we were examining our decisions along the way through a consistent lens. I created a set of 10 core convictions. Think of it as an outline for things which we hold ourselves to be accountable.
You'll hear many of them at work today, and I'm sure you'll hear them in our conversations in the future. I'd like to share with you what I shared with our associates and with our board. In my mind, we must do the following. First, possess a deep understanding of our consumer and instill a love of gardening in every generation. Second, be stewards of our brands. They are the core of our business. Third, provide consumers with innovative and sustainable products that make gardening easier, more accessible, and more enjoyable. Fourth, invest heavily in advertising because we know it works. Fifth, out innovate, out market, outsell, and outperform the competition. Sixth, be the lowest cost manufacturer in our industry. Seventh, develop decisive and confident leaders. Eighth, truly understand the facts of our business, but not be paralyzed by imperfect information.
Ninth, nurture effective long-term partnerships with our retailers with strong service and products, including private label. Tenth, recognize that every associate and every job is important to our success. I said earlier we've made a lot of progress over the past year. I said we were a smarter company, and I really believe that both statements are true. I know things like mission statements and core convictions get a mixed response from Wall Street. Frankly, I was skeptical of myself. These are important reminders for us because as you'll hear throughout the rest of the morning, they'll help us deliver on the answers to the questions that I laid out earlier. Yes, we can grow our category and our market share. Yes, our brands continue to resonate with consumers. Yes, we can navigate commodity markets effectively.
Yes, we're willing to use our financial strength to make acquisitions in an area where we feel we have a right to win. Yes, I believe we're measuring the right things to hold ourselves accountable to our shareholders. I feel really good about where we're sitting right now. The adjustments we've made to our execution for 2012 are good. The marketing plans we have in place and the ad campaigns we'll unveil here today may be the best I've seen since I've been the CEO. When we get consumers into the stores, our products have a fantastic level of visibility. I hope you find this meeting a productive use of our time. I hope you'll see that we continue to have tremendous upside potential. I want to turn the page now and give the stage to Jim Lyski. I want to spend a few minutes setting him up.
We didn't bring him here last year because he'd only been on board for a few days. He's made a huge impact in a very short period of time. I won't hesitate to tell you I think he's the pure best marketer we've had since I've been CEO. As you've heard from Jim King, he's got a great pedigree. He brings a marketing science to the organization that we've been lacking. We said we want to be consumer-centric. We're never going to succeed without having a better understanding of our consumer and how to talk to them more effectively. Jim will be the first to tell you we've got a long way to go in that way. We're a lot closer to reaching that potential with him on board. With that, let me turn it over to Jim.
Thank you very much, Jim. If I knew it was going to be such a nice introduction, I would have invited my mother.
I'm walking in the way.
Oh, yeah. Good idea. I'm very happy to be here and being associated with Scotts Miracle-Gro. It's a phenomenal set of consumer brands. You don't often get an opportunity to work with such powerful brands. I'll go through some of the details in just a bit. The other very attractive piece of being at Scotts is the fact that we have such a great opportunity in front of us. We're already in a position of strength, and we have opportunity forward. That combination is one you don't get often in your career. Today I'm going to talk about what's going on externally to the company that helps direct our decisions, what's happening internally, just highlighting a couple of things you just heard, and where do we put our focus. The punchline is we really put our focus on improving our media, improving our messaging, and innovating to build our brands.
That's basically the agenda for the next 50, 55 minutes. To start, phenomenal brands. I think Barry shared a lot of this data with you last year. You can see here that these green bars represent our brand awareness. We have brand awareness levels in the 90s. What's not shown here is unaided awareness, which is even a more powerful metric. Unaided awareness for Scotts, as an example, in the lawn fertilizer category, it's 63%. Anything approaching 50% is phenomenal. 63% is off the chart. Unaided, just so you know, is when you say name somebody in the lawn fertilizer category. They would name you first, and that would be unaided awareness. The other thing of note here is the market share numbers. You can see the 62% for lawn fertilizer. That's actually up, I think, a percentage point from last year to this time.
You can see the household penetration that Jim alluded to earlier, 46%. Dominant share, 50% of the consumer households yet to accomplish. Let me just ground it all. The next few slides are just U.S. numbers. I'll get to global a little bit later. Once again, the numbers are also significant in grass seeds with Scotts, triple plus over our competitive set. Another number that's not on here is the evaluation of a brand I trust. When we look at a brand I trust, I believe Scotts is at 84% of U.S. consumers. Once again, an extremely well-trusted brand, on par with any brand in the U.S. Household penetration, once again, grass seed even lower than lawn fertilizer. Market share, 51%. I believe that's up a point from last year also.
If you move on to plant food, once again, very similar numbers on the awareness levels, similar numbers on the market share, and also similar numbers on the household penetration. Very thematic here. Dominant brand, still opportunity to grow, very high awareness levels, very high trust factors. I'll get into trust a little bit more on Miracle-Gro, but I'll give you one headline here. We test a lot of adjacencies with the Miracle-Gro brand, like how far can we extend the brand? Right now, we are barely extending the Miracle-Gro brand. It has an opportunity to be dominant in many, many lawn and garden categories. As a matter of fact, I'll talk a little bit later about how we want the Miracle-Gro brand to be synonymous with gardening, all aspects of gardening. We'll get into just how we would go about that. The brand's power is significant.
Jim Hagedorn and his family, over the years of advertising this brand, has really built up an American icon that we can take advantage of. That's another reason why I'm here is because great brands that aren't fully leveraged yet, like I said, there's a lot of road in front of us. If we continue on controls, once again, very high awareness levels for Roundup, Ortho, both. We control on the indoor and perimeter insect, a little bit more of a competitive environment for us. We do have some relationships on some distribution deals I think Barry will cover with the S.E. Johnson brands, Leighton being one there. The trust levels Roundup is in the 70s, Ortho in the high 60s. Once again, very well-established brands, high consumer trust levels.
If you look at beyond the brands and you start looking at just where we are with share of voice over the years, these high awareness levels have built up over years and years of effective advertising. You can see that we have an awareness level in the low 60s. You can see where the rest of the competitive set is significantly lower in the lawn and garden category. These participation levels, so awareness is one thing. Who's participating in the category? How does that change via demographic shifts? You can see here that yes, the participation levels increase a bit with age. It really, if I had the axes on participation levels increasing via how long you've been in your household, it looks almost exactly the same. How long you're in your household really dictates how frequently you participate in our categories.
When you move into a new home, you may do something inside quickly, like paint or something like that. Very soon, about 18 months out, you start turning your attention to the outside of your home. Great way to add value to your home's equity and really improve your quality of life too within your home. The price point for making improvements outside is very reasonable to some of the things you can do inside, like remodeling bathrooms and kitchens and things that can be cost-prohibitive. In this economic environment, these participation levels are looking very good. If we can just get a little bit more household churn, they'll pay off handsomely. Also, if you look during this analysis on how do we look as far as share by demographic break, you can see that our share numbers are very, very good regardless of which age demographic that you're in.
You can see the awareness level, I'm sorry, the share levels are very, very significant. Once again, very strong sign of a great brand. Lastly, kind of on the external environment, I thought this was very interesting given our strategies. Last year, I believe Barry talked to you about the expansion of regionalization. I think it was two years ago we started in the South and in the West. Last year, added in the North regions. This is just a population shift. You can see where the population is going. It's going South and it's going West. Once again, adding to our opportunity to start growing our share in those markets. We have a very strong brand. We are, on a share basis, slightly underpenetrated in the West and in the South.
Since that's where the population is growing, very much escalates what kind of opportunity we have in front of us as far as share and the ability to bring regionalization to life. That was kind of the external and kind of a quick evaluation. Internally, when I walked in the door, did a quick analysis of really how we are performing as a marketing organization. We had a few gaps. As I mentioned, I wasn't very impressed at all with our media capabilities. Frankly, part of that was our partner, who is now our ex-partner on the media side. And then also, we didn't have a good talent pipeline internally. Since I've been there, we hired a Media Director from Yum!
Brands, who's done really excellent work in this year's plan, as well as a Head of Marketing Services, both positions that were kind of gapped when we walked in the door. They're accountable for making sure that we get a high ROI on this investment that Jim's already alluded to. Secondly, I talked to Jim a lot, talked to Barry a lot about our investment level all in. I'm going to come to this in a minute. We were not providing enough ammunition to our brands to fight all the fights that they needed to be engaged in. Being able to beef up that was another core focus. How we plan was another area that we looked at aggressively. We have this great advantage of having wonderful scale, yet we have some significant opportunity in the regions. How do you plan to take advantage of national scale and regional flexibility?
That was another focus area for us. Finally, creatively, we weren't really resonating with that new consumer that Jim alluded to earlier. Consumers are not static. They evolve over time. We participate in all kinds of categories and in different ways now, all through our lives than we did just 5, 10 years ago. Our message wasn't quite keeping up with that new consumer. We traded out a lot of our agency partners, put strong focus on core planning capabilities, creative execution, and media buying. The first area I'll talk about is media. We've already alluded to the investment increase of $40 million. That's about a 50% increase in media. You can see how that breaks out between the brands. Significant increase for Scotts Fertilizers. When we looked at this investment, we put our focus on a few things.
One is making sure that, A, we improve the overall dollars that we're investing in our brands. B, that we put them against our priority products, the products that generate the most value to the corporation. Three, we tried to improve the number of impressions. I don't know if I covered it later, but our impressions have dipped. We started buying a lot regionally. We got some diseconomies by doing that, and the number of impressions we made with our consumer went down over the last couple of years. Four, I built in regional flexibility, buy national and put in a regional message. Fifth, we made sure that we were leaning our POS curve. I'll come to that in a minute. Jim already alluded to this. We made a significant improvement in our digital investment. I'll give details on that in just a minute.
If you look at the 2011 column chart here, you see that was the one I shared earlier in our share of voice, about a 63% share of voice, which is good. If you look over the last three years, it's actually been deteriorating. We've held our investment relatively flat, maybe up just a little. Our competitive set has engaged in the category more aggressively over the last few years. You can see that deterioration. What we want to ensure is that our share of voice is always equal or better to our share of market so that we continue to be able to build out our share of market going forward. Flat investment, stronger regional focus where we bought a lot of spots, and increased competition resulted in this bar chart. As mentioned, we're going to invest $40 million more. How do we come up with that number?
How are we going to leverage that number? I'm going to walk you through this. These lines are called reach and frequency curves. These curves are different by each market. They vary a little based on how you buy your media. This is a representative of how we went about this. We looked at these curves for each of our major brands and product categories. If you look at the blue curve, that represents if you just reached everybody one time in that 8- 12 weeks window of our season, how many GRPs would you have to buy to reach 50% of the population, 60%, 70% on the Y axis? GRPs are on the bottom. The green curve, where we reach everybody 3x and the red curve, where we would reach everybody 5x, is more representative of where we want to be in.
In fact, we have a little sweet spot here somewhere between three and five times during the course of the season, reaching 50% or more of our audience. That's going to require somewhere between 450 and 650 GRPs down here. Like I said, this is representative of each category that we're in. We did the math on here. We said, all right, if that's kind of our sweet spot, how do we do in 2011? I'm sorry. That's one slide from that. The other thing we looked at real quickly was we were heavily kind of into TV, but not really leveraging a lot of different media types.
All this represents is if you were in TV only, kind of what kind of reach and frequency curve you could have versus if you had the same number of GRPs that were in two media types or if you were in three different mediums with TV, digital, and print as an example here, what kind of lift you can get on this curve. You basically spend the same kind of money, but you can actually get an overall lift. That was something that we put some focus on too, just extending the power of our investment. After going through all the math, we looked and said, how did we do in 2011? 2011 is on the bottom. The first thing you'll note about 2011 is there are 31 different kinds of campaigns that we ran last year. That's a significant amount.
You have to remember our season is not 52 weeks. Our season is more like 12. We're running 31 different campaigns. We're just making noise in the marketplace. The second thing is on this dotted square, we looked and said, all right, we talked about that sweet spot on the previous two slides ago. How did we do against that? Only about 5 out of the 31 campaigns actually got to that sweet spot where we believe you can start seeing an ROI on your investment. The vast majority of them came up far, far short. If you look at the far tail, this long tail, that's probably a $200,000 investment. It's a $200,000 investment in a category that's advertising $250 million a year. No wonder we're not breaking through. We shrunk the number of campaigns that we're investing in and we upped the amount of investment per campaign.
If you look at the top in 2012, now we have 10, almost 11 of the campaigns hitting that sweet spot. Those are all of our national campaigns. These ones down here are highly regional. This could be something like Expand 'n Gro test market in Texas as an example. It could be down here where on a national equivalent, it would easily make our sweet spot. We went through the math like that. We realized that $40 million was a good investment for this year to reach these kind of results. It may not be the perfect investment. We'll have a whole new set of data on which to draw our conclusions on how to invest going forward. I think, as Dave already mentioned, we anticipate increasing our AS ratios a bit over the duration of our planning cycle. That's how we went through the media piece.
Secondly, when we were buying media, we had the right dollar amount. How are we going to deploy it? This graph represents a POS curve. This red line is a POS curve for, I think, the average of the last five years, so that we kind of try to take weather out of it a bit. This is our traditional curve. The green bar is our accumulated awareness levels. As you advertise more, which are the blue columns, the green line starts building because you don't forget an ad that you've seen, especially if you've seen it with some repetition. What we want to do is get this green bar to match up pretty well with the top of the POS curve. You can't do that unless you start investing a little bit ahead of the POS curve. That's what we're doing this year.
We're trying to lead the POS curve by a couple of weeks. Like if you were shooting quail, you would lead the bird by a foot or two, depending on how far out it is, to ensure that you hit it. That's the same philosophy here. The other beauty of this is when we start seeing an early break, like in Texas that Jim referred to this year, we already have some media in the market. We're not scrambling at the last second to try to pull in some media to match up with the curve. We also have some flexibility to pull forward too. We can pull and bring it forward to make sure that we're maximizing opportunity, which I don't think historically we've done a great job of. When you're with the wind, put the hammer down, go faster.
That's kind of how we're trying to manage the season. We have these POS curves by market, by category that we're looking at. The other beauty of the increased investment, you can see where our awareness level came in to start the year, which is about, I don't know, it looks like 40-ish, a little below. It builds up. We're going to end the year much, much closer to 50. Next year when we come in here, this green bar is naturally going to be a little higher already. The cumulative effect of investing in the brands that Jim spoke about a few minutes ago. Finally, on how we're going to buy, we're shifting the mix a bit. The green bar is 11. The gray bar is 12. You can see that we have a lot of network TV and cable and less spot and less radio.
The radio is less. It's a percentage of spend because we spend a lot more time buying national radio and then varying the message by market. We buy nationally, vary the message by market. We're pretty much, on just a GRP basis, about the same strength in radio. We're one of the top buyers of radio during the season for sure, but we bought it much, much more efficiently. The reason I point that out is because we had media inflation this year. I'm sure many of you are aware, upwards of double digits, especially in TV. Looking at ways to offset that inflation and increase our overall exposure to our consumer base was how we had to employ some of these tools. Spot TV, you could see, is down. It's down because of an efficiency buy. This buy on Spot TV, we did something called an unwired buy.
It was more effective for us to go out and buy in 220 markets than it was to buy national for this message. Specifically, this is early morning news and early evening news. The networks charge a premium for that because you can buy it all at once. We actually had the agency go out and buy market by market. It's an unwired buy. It allows us an extreme level of flexibility. Because of the inflation rates that everybody saw nationally, we actually got quite a good deal at this. The last thing I want to talk about is this digital investment. You can see that as a percentage, it's nearly double. You got to remember the pie is bigger too, so it's a significantly greater investment in digital. I'm going to break down the digital for you. We invested in search, social, and mobile.
I'll cover each of those just very briefly. These are the search numbers for the lawn and garden, I'm sorry, the home improvement category. In all of home improvement, you can see the search results, people engaging in search going up and up, more than 1/3 now engaging in search frequently. Our category, lawn and garden, is tied with major appliances as the number one most searched category within home improvement. Search is very important to Scotts. Scotts hasn't done a great job, though, in really taking advantage of search capabilities. This year, what we're doing between our paid and our organic search results is making sure that we're always on, meaning within season, we will not skip being a member, being a participant in paid search for our keywords.
Second, we reworked the meta structure of our website to make sure that we start improving the organic search results that we get. Finally, we really are trying to focus on getting better results and more localized content. If we know you're searching from a market that's already broke, we can talk to you about the right kind of products and services to put forward versus if you're searching from a market that has yet to enter the season. That was search. The second area of focus was social. I apologize. I only have this through 2010, 2011 numbers. I could not find people engaged in social media. You can see the red line you would expect. These are the 18- 29-year-olds. They adopted really early. The very interesting part to me is this green and blue lines. These are the Gen Xers and Gen Yers.
You can see the slope of the adoption curve here to the 50+. Social is becoming a very significant part of their engagement in our category, the way that they search information, get results, etc. Social is no more different than word-of-mouth marketing. It's just word-of-mouth marketing enabled by technology. Strong, strong adoption here in some very core demographics for us. What are we doing? We're making sure that we have an ability to inspire and educate and engage our consumer via social. We're doing things like leveraging digital channels. That's Facebook, YouTube, etc. Nothing surprising there. We're integrating with the retailers' programs. This is something that the retailers have really raised their hand and said, we need help here. You guys are the content kings. What can you do to help us within the social realm? They're porting in a lot of our information and our tools here.
Also, we're integrating Bizarre Voice. This is a rating. This is how you can monitor and track and improve consumer ratings of your products and services. We've basically just kind of let ratings, consumer reviews, and stuff like that just kind of flounder out there. Actively managing those has a profound impact on sales. You just have to look at places like Amazon where the consumer reviews or on Zappos, where the consumer reviews are highly influential on the actual sales. This is an area that we're going to start improving in significantly. Lastly, over here, this is Farmville. There are some good endemic type things in the social realm that really play well with our brands. You'll see us leveraging those more aggressively too. Finally, mobile. Once again, this data here officially only goes through Q1 2011. This is the adoption curve of smartphones.
I did recently read in a journal that it's anticipated that smartphones are more than 50% of the total phone market right now. What that really gives us as an opportunity is to facilitate people's search, social, et cetera, on their smartphone. I think you guys all know that more searches are done via a mobile device now than are done via a desktop or a laptop computer. Us being aggressive in this space is very important. A little slow to the party here. Just last week, we launched the mobile version of our website. Important first step. Like I said, a little late to the party. We are going to make sure that we can leverage the solution and reminding power of mobile also.
Things like email reminder services to your mobile device and then also your ability to help you search at the shelf via your mobile device will be two major initiatives for us. Later, Barry is going to talk about this device on the end of the stage here that we put in stores. Everything in there is on my iPhone on my table right now. I can be able to look up different weeds and bugs and conditions of my lawn and garden and know what product to use. We think this is a highly rated app right now on iTunes. I think it's still at five out of five stars. This is another area where the retailers are raising their hands saying, we need a little help here. I believe, Brian, that Lowe's has deployed iPhones and iPads to almost all their associates.
I think they're Apple's number one corporate customer. Lowe's is saying, we were going to do our own app. Since you've got the Ortho Problem Finder and the lawn service guide or the lawn care guide, we'd rather just load those up. We're like, help yourself. As you can imagine, all the answers to your problems have to do with Scotts Miracle-Gro products. It's a nice thing to have on every associate that loads his mobile device. That was media. The next area that we focused on was messaging. As I said, we needed a little bit of a refresh to stay pace with the evolving consumer. We have a new Scotts campaign I'm going to share in a moment. It's all about being a knowledgeable, trusted neighbor and really help pull a lot of our products and solutions together in an easy-to-comprehend way.
Miracle-Gro, this is one where, as I said, we want to be all things gardening. The thing with Miracle-Gro, and I'll cover this a little bit too, is that we've spent a lot of time telling the consumer that Miracle-Gro will benefit your plants, grow them twice as big, et cetera. What we're going to start talking about more and more with Miracle-Gro, to Jim's point earlier, is how Miracle-Gro can benefit you. That brand film you saw earlier, it was all about, it wasn't about how big the vegetables were. It was about what you can do with them, how you can feel. It was very, I don't know, nurturing, not just nourishing, but nurturing and really try to bring our brand to life. That's what you'll see with Miracle-Gro. I don't have the campaign done on that one, but I'll give you a preview of some radio there.
Roundup, no real changes on it. It's kind of the all-American hero killing brand, et cetera. Ortho, as Jim mentioned, will highlight some of the innovation and some of the power of the Ortho brand going forward. Before I do this, Jim, I want to run the, I'm going to show you a spot that was, we called it, I believe, Jim Luby Lawn. This is one of the first spots Jim showed me when I walked in the door. It was a highly successful spot for the company. It was a really good spot for the time. I wanted to show it to you so we can contrast some of the things that we're going to do with it. Jim, if we can cue that, that'd be great. Like I said, very successful. I mean, I saw that ad probably 100x before I ever even worked here.
What you'll notice is a middle-aged white guy, which they buy a lot of our products. Nothing wrong with that being one. He was standing in front of a lawn that was, I don't know, probably five times bigger than the average consumer's lawn out there. He mentioned the color of the lawn probably three or four times. It was all about the aesthetics. You saw a couple of people in the background sitting up at picnic tables. It's all about the aesthetics, all about having the best lawn on the block. Like I said, highly successful, great spot for its time. We started doing a lot of research. I think Barry shared some results of this last year. We did a 4,000 consumer survey study with Copernicus and also some spherical branding studies to really start getting into the minds of the consumers here.
We had a couple of myths on what the consumer was thinking. The first myth was we thought that lawn care wasn't as relevant or important to the younger generation. What we really found was people of all demographics still want a great lawn, overall 64%. You can see under 35, it's actually 71%. What's changed is their definition of a great lawn. Great lawn used to be the aesthetic definition. Now the great lawn is a functional definition. Yeah, it's got to look good. I want something that I can play on with my kids, that I can entertain on with my family and neighbors, that my pets can enjoy, that's good for the environment, and I feel good about its environmental footprint. Those are kind of the new definitions of what a great lawn is.
The other myth that we had was that a lot of people are just exiting the category. What we really found was more sporadic behavior. They'd come in. They'd come out. They'd go. Some would even go into lawn service, come back to do it yourself. Some would say, hey, as Jim said, everything looks OK. I think I'm good this year. The number one reason people were sporadic in their behavior was it looks OK. The number two was, and it's related to number one, it kind of costs a lot of money. As Jim said, 50% increase plus over the last five years for the same level of treatment. Frankly, we haven't innovated in that same time frame either. Finally, the third, which is a distant third, is lack of time. One and two are nearly tied for the top reason.
We took the research and we tried to build up some messaging. What messaging really resonates with the consumer? What we found was messaging that talks about help, I'll do this, I'll lay down fertilizer if it will help prevent future problems. I'll do it once I understand it provides essential nutrients. I want products that are safe. I want products that enrich the soil. These were kind of the key messages that would modify behavior. We took that. We took it to our ads agency. We had them focus in on putting some good creative together. The other insight that I didn't talk about is about 2/3 of the consumers said, I would do more if I only knew how. Part of the messaging was inspiration. The other part was education. We haven't done a super job of educating the consumer in our category.
Our creative challenge was to take kind of that aesthetic of yesterday, leverage an aha moment that we found out during research. That aha moment was once the consumer figured out their lawn was actually alive, it was millions of little tiny plants, then they started thinking, yeah, plants need food. Live things need to feed. They need to eat. Leveraging that aha moment, we're trying to modify behavior that regular feeding and seeding is not only a necessary part of your lawn's care, it is the primary way to care for your lawn. We did a creative brief of regular feeding and seeding with Scotts are the simplest way to enjoy a healthy, problem-free lawn. I'm going to show you four spots that are part of this campaign.
You'll get a sense of how the campaign can treat regular lawn fertilizer, fertilizer and controls, seeding, patch seeding, et cetera, so you get a good flavor of that. That kind of goes back to taking those, remember that long tail graph, taking that 31 and shrinking it down to a number that can benefit from a campaign format. Jim, if you want to run those four, that'd be great. Hopefully, you got a feel for the campaign. It has emphasis on feeding, regular care. One thing I didn't show, another great historical spot for us is something that Jim called neighbor to neighbor. It was neighbor A looking over the fence at neighbor B, how do you get your lawn so great? I use Scotts Miracle-Gro lawn fertilizer. This neighbor plays off of that.
He's also kind of a coach and somebody that can really help you take good care of your lawn, benefit from it. You saw that the feeding, seeding was highly emphasized. You also saw the stamp of guaranteed. It's another thing that we do that we really underleverage. The fact that we will guarantee all of our products for their success is a differentiator in the market that we haven't really made important to the consumer yet. You'll see a much greater emphasis on that going forward. Probably the hardest thing of making the spots is having to find one of those film projectors. I think we had to go on eBay and find one. That was the Scotts campaign. Miracle-Gro, we're also doing some work.
As I said, this is a brand that's beloved and one that I think has just a wide aperture of areas that it could participate in within gardening. Like I said, we want it to be synonymous with gardening. This consumer base basically says, I would do even more gardening if I knew a little bit more. I think about 70% of them are saying that I would do more gardening if I had a little inspiration and a little education. We have two consumers here. We have a pretty highly engaged gardener. They're just looking for ideas. Grow this garden to accomplish X. You can grow a wildflower garden. You can grow roses. You can grow this edible gardening that you can make these great meals with. They're looking for inspirational ideas.
They are actually quite surprised when we start walking through all the product solution sets that Miracle-Gro offers. We have a little bit of education to do with them. The other group are less engaged. They're really worried about failure. I don't want to do all this work and have it not turn out. Here, it's a little inspiration, but a lot more education. The Miracle-Gro brand and the guarantees that we put on top of that really go a long way with this consumer on helping them feel confident enough to participate more extensively in the category. We turned the agency loose on this. Yesterday was about telling you why we were good for your plants. Today, we want you to see Miracle-Gro as a source of inspiration, motivation, confidence. Tomorrow, we want you to see Miracle-Gro for about all things gardening.
The creative brief was Miracle-Gro built confidence and empowers you to have a great garden. We're editing the spots right now. I don't have anything video to show. I think we have one of our spots on the radio just to share, just to give you a little bit of a flavor. What you'll see is it's the consumer's own voice. It's about the consumer now. It's not about the plant. Jim, if you can run that one, that'd be great. You can see how that one's focused at the less engaged, the less confident, and really trying to let them understand that. I think it was an old tagline for Miracle-Gro that you don't have to be a great gardener to have a great garden and how Miracle-Gro really helps bring that capability and that confidence level forward. I should have said Scotts campaign, Scotty.
He's running now in the South up here in the North. You'll probably see him the week of March 6th, I think. Miracle-Gro radio is starting to run. We have TV starting in about a week or so. In the South, in the West, they'll start migrating up in the North as we roll out that campaign. Quickly on Ortho, Jim's talked about this a bit. We have a lot of innovation to introduce this year. We have Wanda, which is the battery-powered spray wand, which is addressing the consumer complaint that they had fatigue and difficulty getting good application of the product out. We have Typhoon, which is a hose-in sprayer that's ergonomically designed so it doesn't drip stuff on you and is much more functionally one-handed. What we're doing with Ortho is really trying to highlight a greater deal of simplicity and confidence at the shelf.
One of our focuses this year was on packaging design. It should, you know, current and future should really say 11 and 12. 12 is the one on the right. Just once again, new balls that Dave Swihart's team rolled out this year for us, new design on the label to make sure everybody understands this is crab grass control. Once again, highlighting the technology with a big placard there on the far right just to pull the comfort one forward. Next year's label is even a little bit more simple than this one. That'll be rolling out shortly. I'm going to go back for a second. One of the target audiences we have for Ortho, I just want to touch on this because it's not just Ortho, but a couple of other areas, is the Hispanic market. You heard Jim talk about the Hispanic market.
We rolled out a spot for Ortho last year, a Spanish language spot. It did extremely well. I'm going to run that spot. I'll talk about it just a bit and the Hispanic market for just a bit. Jim, if you can run that one.
[Foreign Language]
That's what's called [Chunkle or Sandle] It actually was the grand winner for the Association of National Advertisers last year for Hispanic spots, so best in show. Very successful. You'll see us roll that out. I don't know if you know it's the sprayers, last year's sprayer. We'll put the new sprayer on. We're also going to convert that into English also as one more weapon in our arsenal on Ortho, very effective with the Hispanic community. We have a couple of test markets, big test markets going against Hispanics this year. You'll see Ortho having some heavy Hispanic media and a couple of DMAs. We're going to do a Miracle-Gro Hispanic test this year also, and also in-store tests with point of purchase material. We're working with Depot down in Texas on that and converting a lot of our digital assets into in-language.
A significant investment via mainly testing this year. If we can get it right, you'll see a much larger national rollout of the Hispanic effort next year. Like Jim said, the demographics are obvious here where it will not be that far to tell more than 25% of the U.S. population is of Hispanic descent. That was messaging. I talked about media messaging. The third way that we're really building these brands out is on innovation. Jim already mentioned we're spending a lot of time innovating up. His challenge to my team and the R&D team headed by Bruce Caldwell back here and to the supply chain team was that's fine. How do you address that more distressed consumer? How do you start innovating to meet a broader range of the consumer need? How do you specifically start innovating to take advantage of our regional structure?
How do you innovate to take advantage of accessibility to our products and new entrants into our category? I'm going to tell you that the way that I'm directing our team to be able to do this is really about this simple little value equation in the circle here. It just means that value is a consumer's set of perceived benefits over their set of perceived costs for your product. We've done a lot of good work on the numerator, more efficacy, easier to use, all that kind of thing. We've really kind of neglected the denominator. The teams are charged with figuring out how to drive value by affecting both. There's nothing wrong with innovating up. I mean, higher-value products and services that can command a greater margin, great, I'll put that. You can also innovate the other way.
You can create a better margin and higher value by just making it a product that meets the need of a specific consumer very, very aggressively. This equation, simple as it is, is kind of the tool that we're using within product development and innovation to start ensuring that we can innovate up, innovate down, hit accessibility, hit regional opportunities. We also are innovating significantly globally. I think I got a case study on innovation that Jim's alluded to. It's the Snap that's around the room. I think we talked about this briefly last year. We were in multiple test markets last year checking out price points, et cetera. The consumer insights that we have on Snap that really get us on board behind this product is after a consumer uses Snap, 90% of them are extremely or very satisfied with the product.
These are satisfaction rates that are significantly more than anything else that we've tested recently. Once they try it, they love it. The second thing is that 40% of the buyers of Snap did not participate in the category the year before. I believe 13% of them, and I get my numbers right, but yeah, 13% of them had never participated in the category. The last thing on the data that really put this over the top horse was that the average consumer is buying three plus Snap packs. It's not because the Snap packs are slightly smaller than our regular fertilizer packs. They're buying different applications. We already know that multiple applications create a better lawn than single-use applications. We're starting to see a consumer who's participating in the category not only in a way that makes them happier, but also they're going to see better results.
We test marketed Snap. I think Snap is a good example of how you introduce innovation to the marketplace. I talked about when I first got up here that we have just awesome brands. We weren't necessarily leveraging our brand strength as effectively as we could. During the test market, we were talking on last year's line reviews with a lot of the retailers. It was like kind of lukewarm acceptance of Snap. Then working with Brian, we started telling him that, you know what? Forget lukewarm. We're going all in. This thing is going to not be a test market anymore. We're going national. We're going to put $20 million of promotion and advertising behind this. We're going to make a market. Scotts is all in. Once we changed the message there, Brian Kiera told me that the retailers were very anxious then to have Snap.
They were raising their hands saying, you know, a couple of them even said, can I have it exclusively? I'll guarantee you some sales. It just goes to show you that our retailers, as Jim Hagedorn mentioned earlier, say lawn and garden is important to them. Scotts is an imperative for growing lawn and garden. When they see us be aggressive in the marketplace to go out and make a market, they're all on board. These are some of the displays that you've seen on the left. In the middle, we're going after it with endemic programming. This is a guy who does cool tools on a DIY channel, and he does a couple of product demos for us. We're integrated into the websites aggressively on Snap, and our retailers are all in. Significant sales already, just getting ready for the season.
As you guys go visit stores, you'll see stores where we have the prime real estate as you walk in the door featuring our innovation, whether it's this specifically or Ortho innovation specifically. We're very happy with the retailer support on this. I'm going to show the ad for Snap to give you an idea of the support we're throwing behind it. This ad is starting to play in the South and will soon, as I mentioned, be playing in the North. Jim, if we could roll that one. I really liked that Snap spot. I don't know. Jim is probably the one we were scratching our head about when it was on a storyboard, but it really came to light. The actors are fantastic in it, and I think it's really going to drive awareness and trial of Snap.
Snap is, we know, the sweet spot for it is right around $29.99. It'll start going on promotion here very shortly. This is a razor-razor-blade story. We're going to get the unit in your hand. You're going to try it. We know the satisfaction level is already going to be 90%, and we're going to lock you into this franchise because nobody else is able to deliver a product in this medium. Very excited about Snap. That was on innovation. Messaging, media innovation. Lastly, I just wanted to share we're spending a lot of time on measurement and then putting measurement in the tools of the region. You're not supposed to be able to read all of this.
It's just examples of us being able to take the data that we have, the insights that we're driving, and the results, and making sure that Mike Lukemire and his team out in the regions have what they need to either accelerate certain areas, back off in a couple of areas, wait for the season to properly break. Also, with Brian Kiera and his team, making sure that we're managing effectively to get the inventory through, making sure that we're in stock, ready to sell as the media breaks, as the weather breaks, et cetera. We have 35 of these tools. This is just a sample of four and how we're measuring our effectiveness going forward. Lastly, I spent a lot of time on the U.S., a lot of time on our brands. It's because those are our near-end opportunities.
Those are the things that we can affect for 2012, 2013, and beyond. We have the same opportunities globally. Leveraging consumer-first knowledge and bringing that to life through our brands, through the way we message, through the way we buy, through the way we innovate is something we can do across the globe. Ensuring that we're focused on innovation, that little value equation from the consumer's mind and not necessarily from ours, is really where the attention is going to go once this season starts getting behind us. With that, and to talk a little bit more about how we start working on that denominator of that equation, I want to introduce Dave Swihart, who's our Global Leader of Supply Chain and Logistics Management. Thank you very much.
Thanks, Jim. Good morning, everyone. I'm Dave Swihart, Senior Vice President of the Scotts Global Supply Chain. In my 22 years with the company, I've seen the evolution of our unit from one of the worst in the industry to an award-winning, world-class supply chain. We've evolved over time into a team that manages global procurement, planning, manufacturing, order management, and distribution for Scotts Miracle-Gro. I'm extremely proud of the men and women who manage our operations and would take them into battle against any other supply chain in the world. As you know, the Scotts Miracle-Gro supply chain manages COGS of approximately $2 billion. We've told you in prior presentations, approximately 1/3 of our costs are commodity-sensitive. We have historically leveraged supply chain capabilities as a competitive advantage. With today's presentation, I want to introduce you to our historic approach to driving cost productivity.
I want to introduce you to one of our new strategic initiatives, which will further enable cost productivity. I want to introduce you to the material composition of our commodities and where we stand relative to risk mitigation in 2012. I want you to understand how Scotts Miracle-Gro leverages expertise and tools to manage commodity risk exposure. By leveraging historically proven cost productivity tools, a new innovative focus on cost reductions, in-house and external commodity expertise, and a suite of sourcing and optimization tools, Scotts Miracle-Gro is positioned to further drive cost productivity and to manage commodity costs. Here you can see a breakdown of our $1.4 billion of non-commodity-sensitive COGS. Examples of non-commodity-sensitive materials include active ingredients, growing media inputs, and solvents and surfactants. Examples of non-commodity-sensitive packaging include labels, pallets, and corrugate. Over the past seven years.
supply chain team has consistently delivered annual cost productivity improvements of $10 million- $15 million per year. Here's how. One of the ways we enhance cost productivity is to focus on distribution costs. We leverage sourcing events to competitively bid our freight lanes and our warehousing contracts. We leverage tools to cost optimize our manufacturing footprint and add capacity where we achieve a high return. We leverage our assets and network planning tools to optimize our logistics network. Another one of the ways we enhance cost productivity is to continually improve our manufacturing operations. Let me give you some examples. We continually look for bottlenecks to drive unit throughput improvement. We continually benchmark plant performance to ingrain best practices across our 40 manufacturing facilities. We maniacally strive for world-class results in cost, quality, people, delivery, and safety performance.
Another one of the ways we enhance cost productivity is through our world-class sourcing team. They capitalize on our scale to reduce material cost. They utilize sourcing events to drive competitive cost reductions. They're out there establishing alternative suppliers to enhance competition at every opportunity. We will further enhance cost productivity by implementing our new cost-out initiative. I'm very excited about this initiative. Earlier this morning in Dave Evans' presentation, you heard about our long-term plans to improve gross margin. This cost-out initiative is a key component of this strategy. I've already told you that we have a consistent track record of reducing costs, and this is how we're going to do even better. We'll utilize the value equation discussed by Jim Lyski and targeted consumer research to justify product feature costs. We will utilize technology and innovation to develop lower cost alternative materials that maintain or improve product performance.
We will utilize our industry-leading knowledge to simplify products and reduce input costs. In the first two months of this initiative, we've identified over 160 new ideas. Let's look at an example on this slide, which is just one of them. By simply removing a clip that does not have any consumer value, we will save over $1 million annually. Remember, this is just one example. It is clear that the opportunity is huge across our entire assortment. With our proven track record of cost productivity and our renewed focus on cost innovation, we will deliver $40+ million of traditional cost reductions by 2016. We will deliver another $60+ million in innovative cost-out initiatives by 2016. We will deliver better value to our consumers and our shareholders.
By leveraging historically proven cost productivity tools, an innovative focus on cost reductions, and a suite of sourcing and optimization tools, Scotts Miracle-Gro is positioned to crush by over $100 million of costs over the life of this plan. Now, I want to switch our focus to commodity management. Here, you can see a breakdown of our $600 million of commodity-sensitive costs. Urea, plant nutrients, and resins represent the largest components of our commodities. On this slide, you can see that more than 70% of our commodity-sensitive materials are locked for 2012, and more than 90% of our urea requirements are locked for 2012. How do we leverage in-house expertise, market intelligence sources, and hedging tools to manage urea commodity costs? One of the biggest changes we've seen in the last decade is that we have developed in-house commodity expertise as a core competency.
Todd Moore, our leader of Global Procurement, is here today. He has been with Scotts for 15 years. This is how Todd and his team manage commodities and mitigate risk. They manage urea commodity exposure by studying the markets, understanding trends, and constantly interacting with traders and other industry experts. As an example, they understand and monitor the relationship between urea and corn prices. Here, you can see a solid correlation where urea price follows the price of corn. This slide could also lead you to think that urea is a wildly volatile commodity. Looking at within-year volatility as a pattern leads you to a different conclusion. Our experienced buyers and our deep industry knowledge and contacts recognize trends and opportunistic buying windows. Because of our seasonality, we have historically had the opportunity to lock in large quantities of urea for the next fiscal year during market low points.
As you can see on this slide, the urea market is generally at annual lows following the planting season. We rely on fixed-price contracts and hedging to lock volumes when prices are at their lowest, and we utilize spot buying opportunities to supplement our locked volumes. As you can see on this slide, the urea market spiked in May 2011, and the market remained elevated throughout the summer into early fall. Our buyers knew that the elevated price was the result of speculation and not real demand. Based on operational requirements, they chose to only lock modest quantities over the summer and to wait for the market to correct. In the end, we locked a large component of our volume at market lows for 2012. We understand and monitor the global urea market, supply and demand dynamics, and use this knowledge to estimate future pricing expectations.
Here, you can see our expectation that urea supply outpaces demand throughout the planning horizon. We believe that this dynamic will support downward pressure on the urea market. We understand and monitor the global markets daily, and our expectation is that urea will settle into the $350- $450 per ton range for 2013. You can see how Scotts has benefited from the strength of our world-class procurement team. We have a stable of sourcing professionals who manage urea and other commodity exposure. We have a stable of procurement tools to help manage all aspects of global sourcing. We have a stable of market intelligence sources to support database decision-making and execution of optimum buying strategies.
In conclusion, the supply chain is positioned to deliver over $100 million of cost productivity by 2016, effectively manage commodity risk, and create a sustainable competitive advantage for Scotts Miracle-Gro. We are going to deliver these great results by executing the following four tactics: leveraging historically proven cost productivity tools, implementing a new focus on cost reductions, utilizing in-house and external commodity expertise, and operating with a sophisticated suite of sourcing and commodity management tools. I am happy to introduce Barry Sanders, who's going to discuss our operating plan.
Okay. Thanks, Dave. I'm the last thing standing between you guys and lunch. Based on what everybody said, I'm going to bring it all together. Hopefully, I don't disappoint you. I think a good place to start is maybe a little discussion of where we've been and talk about our historical successes and then lead into where we're going. A number of you, I think Jim said there's a number of faces that have been here for a while with us. You understand where we've come from. I remember back in 2000 when I was talking with Jim Hagedorn about why would I think about joining Scotts. At that time, I was a partner at a major consulting firm. He said, "Why would you think about coming here?" The answer was, at that point in time, we'd made a number of investments in where we were going, our strategy.
We had combined a number of businesses. As we had said earlier, Miracle-Gro had merged with Scotts, and then Jim and the board went and bought Ortho and the marketing rights to Roundup. We had integrated all those businesses. We spent a couple of years putting together world-class systems, information systems. We built the world-class supply chain Dave had just talked about. Most of our business had historically gone through distributors, and we built a world-class sales force. That was all in response to some market dynamics that were at that period of time, which was at that point in time, Lowe's was not a national retailer. Walmart was just becoming a national retailer. Depot was still expanding stores greatly. At that point in time, they were adding about 60 million square feet of space a year.
We put a strategy in place that said we're going to be a world-class service provider. We're going to hitch our wagons to them. We're going to grow. That strategy worked tremendously. At that point, when I was talking to Jim, I said, "The reason I'm joining Scotts is your strategy is right, the market dynamics are right, and the marketplace doesn't understand the value that can be created by executing the strategy." If you talk to one of our advisors, Michael Porter at Harvard, he would say, "All good strategies have a shelf life." I would say that strategy that we deployed back at the beginning of the decade, it's somewhat run its course. The growth levers of adding 60 million square feet of space retail-wise, that's not happening right now.
The good news is, I think what you heard this morning is there are some new things that we can take the strong base that we have in place and take advantage of going forward. Our categories are underpenetrated. It's not like toothpaste where it's 98%+ penetrated. You saw the numbers that Jim put up. There's lots of expansion that we can do by getting more consumers in. Number two, there's market share opportunities. Not surprisingly, the further you get away from Marysville, we have lower share. We've talked about that from a regionalization concept. We've also, which I'll talk about in a minute, figured out how to take that regionalization concept and not only compete where we're competing right now better, but how to take that business model and go to new geographies that we're not in.
You heard Jim Lyski talk about how we're going to understand the consumer better. By understanding that consumer better, communicate to them better, be able to give them better value on the products that we're providing, and drive real growth with them. I would say at this point, as I stand in front of you right now, I think we have tremendous opportunities to grow our business going forward. I would say at this point, I think the same thing back in 2000, I don't think the market really recognizes where we're at and the growth opportunities we have. A little bit about our strategies, three strategies: regionalization. You heard Jim Hagedorn say, "We are committed to regionalization." Not only do we think that the opportunities are there that we defined a couple of years ago, but we think there's even more opportunities now.
A little bit about what that strategy is, as we were growing by growing with the big retailers, we had a very centralized business model. We had to standardize things, keep it simple to keep up with that expansion. Now, as we look at our business, there's real opportunity to grow share and go places we're not. That's not going to be managed out of Marysville. We've deployed running our business to the field. I will tell you, we think that not only the opportunities we defined a couple of years ago, but there's more opportunity going forward. The marketing strategy, our strategy had been drive big brands, drive foot traffic into the retailers. I think we did a very good job of that over the last decade. As you've seen from the numbers that Jim put up, there's opportunities to grow with the consumer.
That starts with understanding the consumer better, understanding what motivates them, what they value, what they're looking for, and how to do that the right way. We know how to win on the shelf, but I think we can do a much better job of winning at home and giving that consumer a better experience. Communicate to them better, give them better products. Giving them the better products is driven through innovation. We put an innovation technology advisory board in place a number of years ago. We recognized that we needed to improve the value of our products and how the consumer uses them. Actually, one of our board members, Kate Littlefield Hagedorn, drives that group. We're seeing real value from that now.
I think the thing that's important is you couple that with our marketing and you understand what we can actually do to drive our business and understand those values going forward. Very simple, regionalization, drive share, marketing innovation, drive penetration, and help grow with the consumer. A little bit about our regionalization strategy. We're in year three. A couple of years ago, we announced this in 2010, that we were putting regions in the Southeast, the Southwest, and the West. We had great success that first year. There was a lot of low-hanging fruit. Last year, we deployed into the Midwest and the North and also the International region. Jim said we learned a lot last year. We did. We understand we learned how to organize it better, how to staff it better. One of the things that we recognize is having five regions in the U.S.
was a complex model to understand. We combined the Midwest and the Northeast. We also said it was difficult to manage with all those regions. We put Mike Lukemire in place to manage the U.S. region. We're very excited this year. We think we have a lot of opportunity to grow the business. International, we put Michelle Gasney in place. We're going to make some changes. Actually, Canada was managed out of the U.K. We're going to give Canada back to the U.S. at the end of the season. We're going to focus the European team on the opportunities we have for growth in Europe. Jim said earlier, we've launched Miracle-Gro in China. Michelle Gasney and his team is also going to manage that launch. The benefits that we're seeing going forward, we definitely think there's an opportunity to grow share within the regions.
We'll talk a bit in a minute about our opportunities to not only grow share within the regions that we're in, but to expand into new geographies as well. The other significant thing I think that's in place for this year is the team that you see on the board. It's an experienced group of Scotts people. All of those individuals have been with the business for a long time. They know how to operate with Marysville and how to get things done. If you think about our business deploying into those regions early on, our business model only happens one time a year. It's a very seasonal business. From our learning curve standpoint, we get one shot a year to learn and drive the business. For those southern regions that are on there, this will be year three for them. All other regions will be year two.
What I know from our business and making changes is really the sweet spot of getting productivity and moving people up the learning curve. It's at the end of that year two, beginning of that year three that happens. We have a good team in place, and we think that can drive our business going forward. This slide I actually showed you last year talking about marketing. I'm not going to reiterate too much of marketing, but I think if we reflect on what we said we were going to do and then think about what Jim Lyski said, our historical focus being retailer focused, you didn't hear Jim talk about the retailers at all. Talked a lot about the consumer, our understanding of the research, how we deploy against that. We have been primarily a North America business.
What you're going to see going forward is it's not just U.S.-centric products. We're talking about global deployment. You'll see that in a minute when I go through some of the products. Not incremental product ideas. Not just simply a new claim on the package or the bottle. It's different applicators, ease of use for the consumer, and driving those things that the consumer values. That's going to be breakthrough innovation with them, not just competing harder on the shelf. Annual marketing plans versus global category plans, you'll see that. One of the things that we've historically done as we were a centralized business, we had marketing very involved with the current year business. That makes it difficult to get out there and think about driving those longer-term strategies. As we've deployed our regionalization and they've moved up the learning curve, we've put marketing people in the field.
We're now allowing our marketing teams to focus on those long-term plans. Traditional media, a couple of years ago, I said when we were going to regionalization, we were 95% national media. Now, I think you see a much more comprehensive plan coming out of our marketing team that has a balance of not only national media down to local media, but radio, print, and, I think importantly, web presence and the social media that's going to drive the business. Not just focusing on the products, but driving our brands, investing in our brands, and making sure that we're growing the categories. The final innovation, the pillar innovation, we've made good progress against this. Going back to we've been working on this for a while, you've seen a series of products that have come out over the years.
You go back six, seven years ago, Liquified changed the garden fertilizing business. Pump 'N Go with Roundup has revolutionized the applicators. What you're seeing on this page, EZ Seed, phenomenal success in the grass seed business, not only grew the categories, but grew the margins for us and our retailers as well. This year, Jim talked about Snap and how that's going to transform the lawn business. I think that's going to be special. We talked about not only growing the dollars, but growing the unit sales. Jim talked about, you know, if you look at the number of applications being bought with these, it's double what our traditional number of applications are. A product that we haven't talked much about, Expand 'n Gro , we're test marketing this product this year. Our VP of Innovation said something interesting to me.
He said, "Not since the Egyptians threw cow dung on their agriculture field has there been an innovation like this Expand 'n Gro ." It's truly an innovative product. If you look at the results that the consumer gets in ground with this product, it's spectacular. Both the size of the plants, if you're using it for your vegetable gardening, the yield on it is just terrific. We're test marketing this year, but we're also test marketing at the same time, which is a change in our innovation process, test marketing in the international so that we can have a global deployment of that. Regionalization, marketing, innovation, those are the three pillars. If you look at that and turn that a bit and say, "How are those three strategies going to drive the growth of our business?" Number one, category growth. We have share opportunities with regionalization.
We have to be locally relevant, but also understanding the consumer insights and driving that innovation. We're going to talk about channel growth in a minute. Not surprisingly, we're over-indexed on the big DIY retailers. Every other category outside of those, we under-index on. I think there's reasons for that. Expansion growth, moving into new geographies. We're going to talk about Scotts LawnService and what the interplay is between the do-it-yourself versus the do-it-for-me customers. Those are the three avenues for growth. Thinking about category growth to dimensionalize it for you, this is a picture of just the U.S. business. As we think of the category, dollars that the consumer spends on outdoor living, lawn, and garden, it's about a $60 billion category, everything from live goods, services, equipment, to all the accessories that they use. The categories we compete in as part of that is $7 billion.
If you think of we've been talking about penetration, every one point of penetration that we can improve with the consumer is $75 million of growth. If you think about that from our perspective, it's different by category, but roughly 50% market share for us. Even if we held it flat, that's $37.5 million of growth. As we think we're driving the growth of that category, we should be capturing a higher share of that. You can take this model and apply it everywhere else. The numbers actually get bigger once you move outside of the U.S. because we have lower share and some markets we're not competing at all in. Dimensionalizing what the category growth opportunity is. If you break it apart by categories, I'll hit on this lightly. Jim, there's been a lot of discussion about the lawn fertilizer category. About half of the consumers do something.
We've talked about them being in and out and so forth. The one thing I will address today is that a few years ago, we talked about an important new active that was coming in for lawns, our partnership with DuPont with MAT. We've since pulled back on that. That will not be going out as a broadcast as part of our fertilizer program. There's been some challenges with that. We're pulling back on that. Our intent this year is to test that with the consumer to make sure that we get that right with a spot treatment because it is superior performance active. We would like to get that for consumer use, but it's not going to be part of the fertilizer program. The good news is that is not the only thing coming with our launch business.
One thing we're not showing right now that we will be spending capital against is we have a new fertilizer particle that we're working on, one that gives us better opportunity for cost management, better flexibility on the way that we make it. We can coat it to get different release curves and different characteristics with it. Improvement to the product, to the actual fertilizer product itself. From a regionalization standpoint, making sure we have the right products regionally. Not all fertilizers are the same, and we can deploy those on a different basis based on the needs of the grass. Dave Swihart talked to you about our commodity management and making sure that we're managing those costs, but figuring out how to take those costs down.
Probably the most important thing we showed you a couple of years ago, the process that the consumer has to go through to fertilize their lawn. Even in the ag yourself that Jim showed, it's not an easy process. You got to remember the consumer only does it once a year. They have to buy the right product. They have to understand how to set their spreader settings. They have to understand how to apply and so forth. This new Snap product, Jim talked about all the virtues of that. We think it will not be a quick adopter. We think this is going to be part of the durable replacement cycle of spreaders. As we get more and more of those out there, the ability to drive people into the category and then their usage of the product, we think will improve.
While it's disappointing we're not bringing it active, there's a lot of good things coming in fertilizer. We think we will drive not only, as Jim said, dollars this year, but we're incented to drive units on that business as well. The mulch business we talked a lot about last year, this has been a business that we have not been in. I think we got in it around seven, eight years ago. As we originally defined the market, the bagged mulch business is around $750 million. We have about 35% market share. The exciting news is the bulk market, where the retailer will bring it in a truck and drop it at your place, is actually slightly larger than that. It's about a $1 billion category.
We tested branding the bulk market with our NatureScapes brand this year, tested in a couple of markets, and despite even the weather, had very good success. At the retailers we put it at, we sold three times as much mulch with the bulk as we sell in bagged goods, which, given the market conditions, was fantastic news. We are going to continue to roll that program out. The other thing that we have to do to improve this business, as we got into this business, we would buy bark as a byproduct of the timbering industry as the industry was building 2 million homes a year. As those numbers of homes being built have gone down, that's not quite as available, and the cost and the quality aren't where we need to be. Improving the cost structure this year, we made a small acquisition down in Florida.
If you look at the Florida business, just to give you a scale, it's about a 20 million bag market a year. We had around 100,000 bags. We had to have a supply chain that made sense, a cost position, a product that made sense. As you look at this regional business, getting sources of supply, having the right local product, having the right cost structure, and then doing what we do of branding it and promoting the product, we think this is a big opportunity for us going forward. We will continue to invest. We'll continue to invest in the supply chain, and we view this as a significant category growth opportunity. Our controls business, you know, when people ask me, "Barry, what's going on in the lawn and garden industry?" I think there's some general themes that you can put about it.
As you look at these categories, there's different stories by category. The controls business is the most competitive business that we compete in, and we have very good competition. As we think about our keys to success going forward, we've talked a lot about reducing cost. We need to make sure that our prices are competitive and that we have the right product. If you think about this business on a global basis, you can see the numbers there. We currently have 1,300 SKUs, 250 different formulations. Jim talked about reduction of complexity in this business. It's remarkable that there's so many ways to kill weeds, bugs, and garden diseases. A lot of that's driven by local preferences and so forth. We need to make sure that we're providing appropriate solutions to the region, but we need to dramatically reduce the cost.
As we think about how we do this going forward, partnering with the big ag companies is going to help us reduce the complexity of this by providing actives that we can deploy on a global basis. Jim has talked about reframing the Ortho business, which from a branding standpoint and communicating, is the most diverse brand we have. Making sure that we're clear about the positioning of that brand and what that brand does will help grow that business. We've been talking about naturals for quite a long time. I'll tell you, we've been talking about it as an opportunity to grow our business. I would say it a little differently today. It's an imperative to grow our business. We talked about getting new users into the category. Size-wise, it's not a big business right now.
It's about $500 million, and these are our estimates, about a $500 million global market. The important fact for this business, though, our research tells us that half of all consumers that come into the category will do so these days through a natural and organic business. You think about younger homeowners or apartment dwellers that are coming into the category, the way they've been educated, the social media that they have, how they're thinking about this business. It's no longer an opportunity. We have to be there. We have to have our national brands there. I'll tell you, this business from even in the U.S., coastal business, East Coast to West Coast is different. We have to have our national brands, but we also have to be relevant in those local markets, and our regions will help us do that.
We have to partner with the bigger companies to leverage global technology. What the consumer is not willing to do as part of this, they desire to have the natural organics, but there are two things that you have to have to have a successful business. One is the efficacy has to be equivalent to the synthetic products. When you look at bug killers or whatever, they're not going to compromise the efficacy. Two, in general, they're not willing to pay more. We have a tough challenge. We've got to partner. We know we got to be there. Our R&D team and our innovation team is working hard on this. That will be part of the way that we get new users in the category. From a European standpoint, Jim's talked about the success of our business internationally.
Our most successful business last year, as you look at performance metrics, was actually our Canadian business. I'll tell you, they didn't have any different weather than they did in the U.S. It was just about the same. We had two significant things that drove the business. One is the deployment of our new grass seed business, both the coated technology and EZ Seed to our Canadian business. Number two, if you follow what's happening in Ontario, they banned synthetic actives for cosmetic uses in lawn and garden. We had the only selective lawn weed killer in the market that was a natural product. The most difficult thing we had last year was keeping it in stock. The Canadian business unit had its highest revenue ever and its highest profit.
It goes to show you, you know, Dave talked about weather, what the consumer, if you're delivering on what the consumer wants, you're communicating to them the right way, there's opportunities to mitigate that. If you look at our European business, last year was really their first year of launch of EZ Seed. They call it Patch Magic. We launched in multiple countries with phenomenal success. Our international team had the best year that they've had in a long time. The two other products you can see, which is great news, we're also testing our Expand 'n Gro soils this year in Europe. We're also testing our Snap product in the U.K. and France. Our ability to develop it and leverage the economies of launching it globally, we had talked about our PLM process.
Understanding the requirements globally of how to launch and making sure that we're building it in and leveraging our technology is another way for us to grow the categories. Moving from categories now to channels, I spoke about this a bit. You can see the green bar is our share of our business in that channel. You can see the home center business. We far over-index. The hardware, which we still have a nice business, the hardware, the mass merchandisers, and then you move over into specialty either garden centers, club, or grocery, we under-index in all those categories. If you think about understanding the consumer, there are opportunities to grow our business, particularly in those stores where they visit more often than a couple of times a year.
If you think about convenience purchases, getting our products in grocery, which I'll talk about our SEJ relationship in a minute, people visit the grocery every year. As we can drive our business, have better assortment there, have better relationship with those retailers, it's not going to be the size business that a destination category like a DIY will be. Getting those users in, reminding them of lawn and garden will be important to us growing our business going forward. Another thing relative to regionalization for this, even in hardware, hardware is a national retailer. A lot of them, you know, kind of here in the Midwest, the co-op offices are here. All of those retailers, though, are independent business people.
Our ability to have our regions have a more significant relationship with them, deploy our programs, communicate to them better, and build our relationship to drive in those channels will be important going forward. The key to our business, though, one of the things we learned last year, we moved, we took Brian Kiera out of running the Midwest region and moved him back in to run our business development group here, is making sure that we continue to understand how important our relationship is with our three big retailers. We talked about what some of those challenges were. I think the key for us going forward with these three customers is being consistent to what we've been in the past. We've had a great relationship with them over the last 10, 15 years.
As we continue to evolve our business, making sure that we maintain that relationship and we're helping them evolve with us. Getting people into their stores, making sure we're integrated with them, making sure our service teams and so forth are working properly. I think one of the learnings from regionalization last year is if you're talking about channels and we're talking about growing in a channel, it's hard for the region to only look at it from their region standpoint. You need to have someone central that understands the category, develops the products, develops the programs for the retailers, and makes sure that we have the things in place to drive the business. Maintaining our relationships here with the big three, I think we're in great shape right now. Brian's going to make sure that we do that going forward.
Then you take what's great about our relationships with those top three and say, "How do we deploy that into other channels to grow our business?" One of the important things we do for the big, at least the DIY retailers, is we have people within their stores to give consumers advice of how to buy our products. We talked about earlier, we're deploying these units. It's actually an iPad. Jim talked about the problem solution center either for lawns or controls. We're putting these this year in 1,000 retailers. We'll have the technology right there. The economics won't support having a person there, but at least if they want to get it on their cell phone, we'll remind them that it's in store and making sure that we're giving the consumer the advice on how to buy the product.
I think if the information is in the tool, it'll help us make sure that also the product's on the shelf. Because if this tool is recommending that they buy a particular product and they don't have it, that would be a problem. It's going to help us expand our distribution with those retailers. The garden center business, an important destination, they have great retail outlets. They have knowledgeable people in their stores. What we need to do for them is give them products that they can compete on. We talk about our scale. They don't have the scale to compete. They need some different type products to help them maintain their margins.
You can see some of those products here, making sure that we're giving them exclusive products and brands, and making sure that we're tailoring our programs with them, with products like a knowledge center or some specific advertising. Number two, they all are small independent business people. Making sure that they know that we're going to be there for them long term and that we have consistency year-over-year will help improve our business. Our relationship with SEJ, we announced that a year ago. Last year was the first year with it. We had great success. You can see the numbers. Our respective businesses both grew over 50%. It shows you that expertise does matter. They're pretty good at the grocery drug business. We're pretty good at the DIY business. They took our products into five of the bigger grocery stores.
We took Rate and Off into Lowe's and Depot and had great success. We're expanding the relationship. We're expanding it in two ways. One is they're going to represent a broader portfolio of customers for us. In some cases, not just grocery drug, some potential particular mass accounts or discount channels that we think they could do a better job. We're also going to expand our relationship for them into some other category or other channels that we have expertise. We're also talking about, from a product assortment standpoint, expanding beyond just the Rate and Off brand. Growing our business across the channels is not just a matter of us developing the expertise. When we can leverage the expertise and economies of someone else, we'll partner with them. We think that's a better way of going to market.
From a business unit standpoint, two businesses that have been historically challenged for us. Some of you have asked me, "Why are you in those businesses?" Our international business and our Scotts LawnService business, historically, they've been slower growth and lower return. Last year, we've been working with them for a number of years. They both had solid years, top line growth, margin growth, and they're doing very well in the profit. One of the challenges I gave, particularly Scotts LawnService three or four years ago, was, "Don't talk to me about any investment until you're returning better than your cost of capital." They're doing that now.
We view now them not as a drag, but if you think about not necessarily size-wise, but opportunity to grow from a growth standpoint at a percentage level, we would view them now as higher percentage growth opportunities than our core business. Just an example of that within Europe, Germany and Western Europe is the largest lawn and garden market. It's about $1 billion. Of the categories we compete in, we have about a 10% share. In Germany, the largest category is growing media, about $350 million of which we have zero share. Actually, growing media is our largest category that we sell. We're not even selling that category in Germany. Part of the whole regionalization effort from selling all of our categories, we will be launching growing media at the end of 2012 in Germany.
We'll lead with our innovation product, our Expand 'n Gro , and then we'll pull other growing media behind that. We would expect that we could significantly grow our share and the size of our business in Germany. If you think about international business altogether and deploying the model that we have, we have a small business in Poland. There's significant upside there. We have very little business in Southern Europe and Italy and Spain. We have no business in Eastern Europe as you move forward into Russia. What I'll tell you is there's more opportunities for growth within Europe than we have capacity. I think the key important thing is when we go into those markets, we will not take it lightly. We'll go in and we'll make sure we're successful because I don't think you get second opportunities in these markets.
Right now, it's Germany's number one from an existing market. From a new market standpoint, Jim talked about going into China with Miracle-Gro. We studied the market for a year. The average Chinese family has eight indoor plants, primarily apartment dwellers. There is no product that's there. We're test marketing in three cities: Guangzhou, Shanghai, and Beijing. There are 60 million households in those three markets, which is remarkable considering the U.S. has only 75 million households. We have a great marketing plan, a little different way of introducing product. We're handing out 10 million product samples. We've got some great branding. You can see the billboards in the subways. We're right now gaining distribution. This will be the first year, but we think this business will grow nicely. We think then following on very quickly with growing media is a good opportunity.
From a consumer standpoint, going back to the strategies, regionalization, marketing innovation, drive the category growth, drive channel growth, and then expand into either market share in existing markets or enter new markets. Transitioning to Scotts LawnService, we started Scotts LawnService in 1998. For those of you that are new to us, we were doing some consumer research. It came back that we were the number two lawn service company in the United States, and we had no lawn service company. In 1998, we test marketed in Cleveland, Columbus, Cincinnati. You can see where we're at right now, 171 branches, about half of them owned by us. We do have franchises. When we talk revenue, Jim said $250 million. The $300 million I'm showing here is network revenue, which we do not record the revenue for our franchisees. That goes into other income.
There are 600,000 customers, 7% share. We are the number two player in the market. The number one question I get asked is, "Why are you in this business?" I get it that the brand makes sense and so forth. I think there's two primary reasons. Jim talked about the one earlier, ability to leverage economies to scale. When Jim Lyski advertises the Scotts brand at the weight that he's advertising at, we get a lot of collateral benefit by that advertising. As we're developing products, we get a lot of sharing across that. I think one of the things that's most important, the second piece is understanding the consumer and understanding what drives that consumer. What this chart shows is age across the bottom, where the customer starts participating either do it yourself, do it yourself and do it for me, or complete do it for me in total.
One is consumers move back and forth. As we can use our brands to make sure that we keep the consumers in our franchise. Number two, as the consumer ages, you can see at the tail end, there tends to be more do it for me. As we've been working on our marketing program with Jim Lyski, we've said the ability for us to maximize the value of that consumer from the time they enter the category when they buy a home or an apartment to when they retire, we should not be giving away those consumers as they get older. We have the opportunity to brand it, to keep them in the franchise, and grow the business. The most important reason why we have the capability and credibility to do that is, you know, it was a startup business back in the late 1990s. We grew pretty rapidly.
You can see on the right-hand side, we really figured out the model. We know how to run the business. The business is driving better than its cost of capital, and the business has been growing nicely, even during the periods of the economic situation we've had here in the U.S. over the last three years and the weather conditions. One of the theories I've heard is that this is a far more cyclical business than do it yourself. If you look at the business as relatively flat to slightly up on the revenue side and has been up substantially on the profit side. I would make the argument it's a little less cyclical because once the consumer signed up and you're doing a good job for them, you don't have to motivate them to go into the store to buy the product.
They just pay their bill and they keep having you do it. We think it's a good business going forward. The opportunity to grow the business, accelerate share once again, and accelerate share in the right way. Density is a concept of if you have customers that are close together, it's more profitable not having a lot of windshield time, the Technical Associate driving too far a distance. Grow the market close in. We are servicing about 65% of the market. Our goal here says we can get, we should get to 75%. We can actually go slightly higher than that, so we can not only increase density, but we can gain share. The other thing that we've been testing in this business is a model that integrates pest care with our lawn service.
We have a technology that allows most of the applications to be done only on the outside. The same service technician that fertilizes the lawn can also do the pest treatment on the outside. We only have to go in once a year. We've tested it. We started the test in Florida. We've expanded to Georgia and Texas. Now we'll be looking at taking that on a national basis. Roughly for us, $250 million, we think we can grow the business organically $100 million over the next five years. Through acquisitions, we can probably push that up to $200 million. It's a nice return business. It will not take a lot of capital, and we think we can get nice returns on this. Most importantly, keep the consumer in our franchise.
Summarizing where we've been, the three strategic pillars, very straightforward: regionalization, move our business out into the field to be managed and drive share and grow to new geographies; marketing, understand the consumer better and market to them and communicate to them in better ways; innovation, improve that value equation to the consumer that we're delivering through our products. How are we going to use that to grow? Through category growth, driving penetration, getting our fair share in all channels globally, and then expanding to geographies and spaces that we're not. Keeping in mind, I think, two important things. Part of this we learned last year as well. Our competitive advantages as we go through here, we have to keep these in mind. Number one is scale. We win by having the best scale. Dave Swihart talked about having the lowest cost.
It's an imperative for us to drive our business. Number two, driving our brands. Part of driving the brands is understanding what those brands mean to the consumer and making sure that we're investing properly behind those brands to drive the brands with the consumer, then leveraging our expertise and educating the consumer and giving to them simple solutions. The operating model, that's how it all comes together. Both Dave and Jim talked about what are the guardrails, if you will, and what are the imperatives for how we'll manage this. Driving profitable growth, we're going to do, we are going to grow our margins. We will not grow revenue at the expense of margins and making sure that we're maintaining that appropriate margin structure. I will tell you, all of our businesses, we have plans to move the margins up within the respective categories.
Number two, making sure that we're looking at capital is how we invest in those categories or those businesses, making sure that we're investing properly to get the right return on invested capital. If you think on a year-to-year basis, how we're managing the respective P&Ls, we've talked about investing behind our brands so that margin growth is an imperative. We want to invest more aggressive than just what the margin expansion is. We have to control our G&A and make sure that we're controlling that and delivering leverage on the P&L that Dave talked about. The operating model, the guardrails are growth, higher margins, ROIC, invest in our brands, and then make sure that we're managing our G&A so that we're doubling up on the sales growth over the G&A. Quick summary, I wish I had more time, but the clock tells me I'm out of time.
I think will do Q&A later, but now Jim King is going to come up, do a little housekeeping, and we'll move on to lunch.
Thanks, Barry. Hopefully, this morning gave you a good sense of where we're headed both in the near term and long term, and that you found the presentation useful. We're going to switch gears here. We're going to take a break for lunch. They're going to bring lunch out here in about five minutes. If you're listening via webcast, I would tell you to stand by until about 12:45 P.M. At that point, Dave Evans will come back up, give you about a 15-minute brief on our guidance, more specifically for 2012. The entire team's going to reassemble for Q&A up here on the stage. One other piece of housekeeping before we break, you've seen these Snap spreaders around the room here.
Heard a lot about it this morning. Have a model of the Expand 'n Gro product over here on the left side of the room as well, or my left. On the outside, when you're walking out, there are gift bags out there that have an Expand 'n Gro product in it, EZ Seed, and our new bird food product as well. Heather Scott is going to be distributing these cards this afternoon over lunch as well. If you're interested in test driving a Snap spreader yourself, if you have a lawn, there's a lot of lawns here in New York City, I know. If you have a lawn or you know somebody who does, fill out the card, let us know where you want us to ship it, and we'll get one in your hands. Hopefully, you'll have a good experience and you'll let us know.
We're going to take a break for lunch now and be back at 12:45 P.M. Thanks.
All right. In the interest of keeping this on time and keeping this moving, I'm going to start while you're eating your dessert and provide a little bit more color on 2012. As Jim King mentioned, we'll do Q&A following that. We spent the morning outlining our long-term plans for the business. We're going to shift gears now and focus on our near-term expectations for 2012. As we discussed on last week's earnings call, we do continue to feel positive about our top line growth as we start the season. Over the next several slides, I'm going to walk you down through the P&L, and I'll highlight some of the key drivers supporting our 2012 expectations. I'll start with the top line. In aggregate, we're expecting growth of 6%-8%.
This largely reflects our expectation for robust category growth shaped by what ought to be a favorable weather comp within the U.S., as well as sales lift from our improved media plan that you heard Jim Lyski describe. For the global consumer, we expect growth of 6%-8% driven by category growth in units of 5%-6%, including an assumed weather benefit of about 3%. We expect additional category growth driven by pricing of about 1%, an additional 1%-2% growth in sales driven by a 50- 100 basis point gain in market share, which we believe our media plans and retailer programs support. We have a 1% headwind from FX driven by the weakening euro. As a reminder, consumer purchases of our products at our largest U.S. retailers declined almost 4% in 2011.
This was principally due to unfavorable weather across much of the country and over an extended period and lost share at our largest mass merchant retailer. For 2012, we're assuming weather reverting to the mean and a much improved presence at retail driven by off-shelf display. We're not assuming any meaningful benefit from an improved macroeconomic environment. For Scotts LawnService, we expect growth of 6%-8% driven by year-over-year growth in customer count of 4%-6%, pricing of 1%, and up to 1% additional growth from improved program mix. We also expect growth from acquisitions of about 1%-2%. We expect sales in corporate and other to be about flat to 2011. As a reminder, sales in corporate and other consist of our supply agreement to ICL and our pro-seed business.
We continue to work towards complete liquidation of all pro-seed inventory and expect to complete this process by the end of 2012. Shifting to gross margin for 2012, we're expecting a rate of about 35.5%, give or take 25 basis points. Let me explain the primary drivers bridging 2011- 2012. As we've consistently said, commodity inputs are increasing by up to $80 million versus last year. This is going to result in about a 280 basis point margin rate dilution. We believe we'll see a disproportionate impact from higher commodities in the early part of the year when our year-over-year comps are more difficult. Dave Swihart provided an update on our commodity purchasing activity. We already know we're about 70% locked at this time. Our remaining exposure for 2012 was largely in resins, grass seed, wild bird food grains, and fuel.
We took price actions equivalent to about 100 basis points, partially offsetting commodities. Pricing included adjustments to trade spending, some of which were consciously redirecting to broader category growth brand building activities. We anticipate around 90 basis points of improvement in margin rate from improved mix, increased volume, both representing the recovery from 2011. If you'll recall, the cold and wet weather last spring disproportionately impacted our lawn fertilizer and weed control products. These represent some of our higher margin categories. In addition, we expect to see a rate benefit of around 30 basis points from supply chain productivity improvements, including benefits from recent restructuring activities. This is a continuing story as we continue to see $10 million- $15 million of annual productivity improvements from our supply chain. Moving on to SG&A, we expect expense of around $750 million. Growth from 2011 is principally driven by two items.
First, the increased media investment behind our brands. Advertising in our U.S. consumer business will increase about 50% versus 2011. Jim Lyski provided you details on that earlier this morning. Second is reinstatement of at-risk variable compensation, which was reduced to nearly zero in 2011 as a result of our earnings mix. Offsetting these increases, we'll see benefits from the restructuring we recently completed, as well as a slight benefit from FX. Moving further down the P&L, we'll start with interest expense, which we expect to increase $10 million- $12 million. We'll see a 40- 50 basis point increase in our rate spreads, resulting from the full-year effect of our 2011 bond issue and the new credit facility we closed last June. We expect a modest increase in average debt while we strive to navigate within our 2x- 2.5x debt leverage guide.
We expect fully diluted share count of about 62 million, benefiting from the significant share repurchases in 2011. The 62 million share guidance contemplates about $17 million of shares, which were repurchased in our first fiscal quarter of 2012. Any further repurchases in 2012 will be executed within our debt leverage and uses of cash guides. Because we only benefit from a partial year weighting, further repurchases in 2012, if any, will only marginally influence the 62 million shares we're guiding to. In any event, additional share repurchases in 2012 would reduce the year-end value by no more than 0.5 million shares. Moving on to operating cash flow, we expect reported operating cash flow of about $300 million. This is a significant increase from 2011, but it may not entirely represent a sustainable long-term base. Let me explain. In 2012, we'll have certain non-recurring cash benefits, which may not repeat.
They arise from three items. First, annual cash payments of variable comp in 2012 earned in 2011, as I just said, were nominal. We wouldn't plan to anniversary that in 2013. Second, we have a non-recurring benefit from the liquidation of our pro-seed inventories in 2012 since there's no replenishment. Third, we're recognizing cash tax benefits in 2012 from accelerated depreciation, which was a temporary measure granted by Congress. The status of this beyond 2012 is uncertain. I saw Barack Obama's proposal last evening would continue this, but I would say this is not likely to be resolved until after the elections. When taken together, these three items benefit 2012 operating cash flow by about $75 million. If we were to assume that these didn't repeat, we'd expect pro forma operating cash flow of about $225 million, which is a more representative base from which to model in 2013.
Next, let me address a frequent question from the analyst community, and that's quarterly pacing. While we don't provide specific quarterly guidance, we do want to avoid surprises. With this in mind, I'd share that we expect our first half sales and operating income as a proportion of full-year results to be reasonably in line with the trailing four-year average. Those four-year averages are identified in the slide. Similarly, the trailing four-year averages for Q3 and Q4 as a percent of the full year are good proxies for 2012 for both sales and operating income. Remember, though, this is simply a proxy based on weather reverting to the mean. As we've said in the past, a weather-driven shift of consumer activity between March and April will always have a material impact on our second and third quarter splits.
Below operating income, for purposes of thinking about quarterly pacing, we would call that we expect the full-year increase in interest expense to principally occur.
Half of the year. Tax rates should be about 36% for all quarters. Also, I've been asked this before. When thinking ahead to 2013, I'll reiterate what I said on our recent earnings call. We expect the first quarter of 2012 to represent the new norm in absolute terms, barring any unforeseen changes in commodity costs. The last slide of the day represents our 2012 financial expectations. As you see, we're guiding to an earnings range of $2.65- $2.85 per share. I'm sure you can tell from the team's enthusiasm this morning, we're really excited as we head into the spring. Our Southern U.S. markets have gotten out of the gate on a positive note. Our media plan, which we believe will have a big impact, is just now launching.
Our field team is prepared, our retailers are engaged, and we expect a strong response from consumers as spring moves north. We're confident of our operating plan and look forward to financial results to follow. That concludes my remarks on the 2012 guidance. At this point, I'd ask Jim Hagedorn and the rest of our team to join me on the stage to take your questions. I think Jim King, once the team gathers, maybe you'll say a few words to get this all started.
Thank you. All right. If you just raise your hand, we'll get a mic to you. I ask you to wait until we get you a mic so that folks on the webcast will hear, and we'll eventually get to everybody.
Hey, Mark.
Here we go. Question there.
Thanks. Good afternoon. Just a couple of quick ones. I guess I'll start with pricing, because that's a hot topic of the day, I suppose. On the recent earnings call, Jim, you mentioned that 2012 was more of a holding pattern with regard to pricing. You mentioned that you could price if you wanted to, but you wanted to balance the health of the category. You quickly said that starting in 2013, you're now going to get much more aggressive on pricing. I'm curious, what's going to change dramatically in 2013 to make you more aggressive on the pricing front? Secondly, just going forward on pricing, is your strategy to offset the dollar impact from commodities, or do you want to maintain margin as those commodities inflate? Thanks.
They're all landmines in all those questions. I'll start in reverse because I can remember it. I think when Chris Nagel was my CFO, we got into a mode of just offsetting the dollar cost. The problem was that was, I don't know, between like 25-50 basis points, kind of a year of margin dilution. It really took pricing when commodities went up and then when they fell, holding that pricing to sort of get back a lot of that. I think ideally you'd price for margin percent. As we run through, and this is a little bit, I'm speaking from corporate kind of, and Barry may have a, and this is what we built, is that Dave and I are kind of the investment managers of the business. What we need to see is improving gross margin percent. That's going to be a matter of mix.
Pricing will be a part of that as well. What's going to change? My view of what's going to change is we're going to show we can grow the category. We're going to show that we're deploying that money in a responsible way. One of the things that moves along with this is something that Barry and his team, with I think support from Dave's strategy group, are working pretty hard on, which is just retailer programs and what we do to drive the business. What is clear is that programs as a percent of sale are increasing without a sort of corresponding increase in unit volume motion. I'd say are relatively unproductive. I think what we needed to do is hold, not try to add too many sort of variables to what's going on, i.e., no pricing, particularly on lawn fertilizer.
That was where the biggest cost increase hit with urea. Do the advertising, do what we're supposed to do. I don't think anybody would argue within Scotts Miracle-Gro that that's sustainable for us. The gross margin is our jet fuel. It's what we fight wars with. We've got to show we're responsible warfighters when it comes to selling products and marketing. To some extent, I think we've got to get our house where we want it. That's what I would say is different. I don't know, Barry, how you'd answer it.
A couple of things. We're spending a lot of time, and Dave is leading us, looking at pricing. To me, a perfect world would be as if we don't give the cost to any of the marketers because we're conditioned to think in terms of a particular gross margin that we're supposed to receive. As Jim talked about value to the consumer, we need to decouple from being a cost-plus pricing and understand what they're willing to pay for and what they're willing to pay for. If you look at categories that we.
You say they, the consumer?
The consumer. If you look, you know, when we launched Pump 'N Go with Roundup, they told us we could not charge over $20. That has revolutionized the category, and it has just taken off. People said we were charging too much for EZ Seed. It substantially grew the category and improved our margins by 50%. I think strategically understanding where we can price, number one. Number two, you heard both Jim Lyski and Dave Swihart talk about if we can mitigate commodity cost increases by taking cost out that the consumer doesn't value, we would like to drive more units by holding prices where they are. I think both the combination of strategically where we can price, taking cost out, and making sure that we're delivering on that value equation that Jim talked to will give us the opportunity to grow the categories.
Part of this year, taking the year off is we're going to be working on that through this year, and we'll know much better where we're at next year, and we'll make choices based on where we're at on that going forward. We didn't have those things in place for this year. To Jim's point, we took a year off, we'll reset, and then we'll think about that going forward.
Go ahead, Al.
Okay, I have two major questions.
Two major questions?
Well, two.
As opposed to minor ones?
Two questions. One is about fertilizer. It's been a very big deal to you that volume has declined over the last five years, every year in consumption of fertilizers. I can see how the Snap is a great product and will definitely, you know, generate upward shift in mix. My question is, if you're not able to change the lifestyles of people and get, you know, unit growth of fertilizer to grow, does that prevent you from reaching your targets? In other words, is the upward shift in mix you get from the Snap enough together with all the other things you're doing to get to your target, even if volume, you know, usage of fertilizers continues to contract just because of lifestyle issues?
You know, I'll give my point of view. I'm sure that between Lyski and Barry, they probably have a point of view. First, I got to say, I don't accept that. If you were to say, I believe that, you're saying you believe it. A lot of this work we've had, this retrospective work of looking at the business, started out with a meeting with one of our board members, Barry, Jim, and myself in Paul Washenen, where we were looking at lawn unit volume over the period and the ad support behind it on a sort of long-term basis, in terms of GRPs, the actual rating points that go behind it, and really didn't like what we were seeing and promotional spend behind lawn fertilizer sales that I think appear to be extremely nonproductive.
I think this is really what started a lot of this discussion internally of saying, we're going to really dig deep into this. This all occurred late summer of last year. I think that if we can't show that we can grow volume with a sort of 80+ percent increase in media support given reasonable weather, then I think we've got a whole different discussion to look at. I mean, as we looked at this and prepared for this meeting, we spent a lot of time talking about how we were really behaving in regard to our lawn fertilizer business. It was really kind of milk the business. What you saw is dollar volume up, market share increasing, gross margin increasing, profitability of the business at this operating level or wherever you want to look at it, significantly up.
It looked to us more like it was kind of a milking operation than it was actually running the business to grow it. I think if we reconfigure the business for growth and we can't make it grow, I would say we're kind of back where we started, which is that it's an extremely profitable business and historically profitable. It's not like it's all lost, but I don't think you'll see that, actually. I think what you'll see is that all the work that Jim's doing makes you feel really confident that no matter what your age group, if you own a home, you care about your lawn and you want to participate, albeit what you said about what is success. I think this is purely kind of a marketing exercise. I don't think that this is a matter of people don't give a shit anymore. That's kind of my.
Yeah. In addition to what Jim's saying, part of the message is we've trained the consumer almost to a certain extent that our fertilizer programs have become problem solutions. If you think about prevent crabgrass, prevent dandelions, prevent bugs, and so forth, if you don't have those problems, you may not think about fertilizing. I think part of the campaign that Jim's going out with is, you know, feed your lawn. It's a plant. I think that has the opportunity to change the consumer's mindset relative to the category. It's about fertilizing. If you need to take care of those problems, we have multiple solutions for you. I think that's number one. Number two, in going to the Snap lawn care system, Jim talked about the ease of doing this. I think that is a big deal with the consumer.
First, tell them they need to do it and then make it easier for them to do it. You know, Alice, I don't think we're going to take a short-term view on this. It's not we're going to test it this year and if it doesn't work, we're going to consistently drive this. I think this is a matter of building equity over time and we'll see how this works over the planning horizon and probably then make an evaluation of it going forward.
Barry, I could add something as well. This wasn't necessarily the lens that Jim, you and your team approach this from, but, you know, Alice, last year we talked about the weather and the impact that weather had was disproportionate on lawns. I think that goes back to some of the messaging that Jim Lyski talked to earlier in the day, that it was really more about the cosmetic appearance of your lawn. If it's damp and cool, the lawn looks great already, so the consumer is not getting that visual cue this time to take care of it. What appealed to me about this campaign from a, you know, maybe from a CFO's risk perspective is that I think if we begin to train consumers, it's really more about feeding and every living organism needs to be fed.
To me, over time, it'll reduce that, hey, it looks great because it's cool and wet and damp to I need to feed it anyways because it's a living organism. I kind of see some tangential benefits from this as well that are appealing to me as the CFO.
Jim, I think you said it well. To answer your question specifically, we already proven that we could run great profits out of this business. We have nowhere near capped out on how high we could raise the price if we wanted to, but we don't think that's in the best interests of the consumer nor the long-term viability of the category. Yes, we could hit our numbers without selling more units.
You talked a lot about household penetration, and I just wanted to know what kind of improvement in household penetration is implied in your outlook and where do you think it can get to? On top of that, can you give us some granularity on the decision-making criteria around price changes, what metrics you're looking at, and do you have a sense for magnitude of range of changes that you could potentially make going forward?
To answer your first question, the penetration that Barry referred to, you know, $75 million in increased category size with the other 1% of penetration. If you look at the growth we have over this planned period, we're assuming, I would say, a low single-digit growth in that penetration because part of what else we're focusing on is increased usage of those people who are participating. Jim provided some good detail on the Snap lawn care system, but it's the way we're thinking about even like the new wand on Ortho. I was faster to this thing last year. When you start using this, I could tell you I burned through that product a lot faster. We're focused on a combination of increased penetration as well as increased usage for those people who are participating. It would be low single-digit to live in.
I think she had one more question, Dave, about range of pricing we're thinking about.
Oh, range of pricing. If you take the premise of commodities growing at, call it, 2X GP, my crystal ball isn't that good. If that were the case, we would need, call it, 1%-1.5% pricing per annum on average to cover the cost increase. Okay. What we're really looking for to grow our margins, there were three principal initiatives, one of which was pricing. I would tell you that our expectation is to get something more in the neighborhood of 2% per annum to try to drive this. As we've said, we've already begun to, we've been approaching this in a very different way, and I'd say a much more professional way this year. As Barry Sanders said, it's not the same old cost plus that the companies have kind of grown ingrained with doing in the past.
We're really doing it on a consumer-first perspective using the equation that Jim Hagedorn shared. We think we can already identify and see some opportunities. That would be, Olivia, about the order of magnitude that we're shooting to hit over this planned period.
[crosstalk%%]Me first, I guess.
Okay, I'm sorry. Two questions.
You're getting hosed here. What?
Both questions have to do with SG&A leverage. First of all, this is probably the curse of an analyst that's covered you a long time, but I looked at over the last 10 years with respect to SG&A growing only 75%-85% of sales. That's only happened in five of the last 10 years and very infrequently in the same year that you had gross margin expansion also. Yet you're taking a look at over the next five years, basically every single year you're going to have that kind of leverage. That would suggest that something either culturally or structurally has to change with your outlook with respect to marketing spend. I know you talked about the compensation metrics changing a little bit, but they're still overweighted toward sales growth and not really toward leverage.
Help us get some comfort that there will be some operating expense leverage over the next five years.
Okay. I'm going to take it and I think both of these guys can be useful on it because they both have really important roles to play in sort of taking what are our sort of guides for value creation and making sure they get accomplished. You know, it's just me being me, but I would say that if I was to be a little critical of ourselves in the past, you know, kind of what you were saying, except maybe a little more critical, is that one of the things I feel really good about today is that the way we're operating the business, Dave and I are sort of saying, okay, this is what we think creates value. What do we think is achievable? Then we hand that to the operator team. At the end of the day, Barry's got to then actually produce against that.
We can put limits in place. That's kind of what I heard today, really for the first time, is that as we create budget targets for the operators, there's going to be limits on it. This all goes to the idea of we're driving toward something. You know, we're driving, you know, this is, I'm not going to say we got burned last year, but it was a rocky road last year. I think everybody, it's not that complicated for us to sit down and say what drives value and what destroys value. The targets that we've come up with are not optional. That doesn't mean they're going to happen in a smooth line, but they're not optional. My expectation toward the operating community is that the operating community takes budget targets over the planned period that they've agreed to. It's their responsibility to figure out how to do it.
You know, I spent a lot of time with Barry on this very issue of saying, look, there's a point where it's agreed to, we hand it off to you. The problem that I think we've had in the past is that has not been a very smooth handoff of the baton to say, now you own it, dude. We are going to be hard asses if you're not showing that there's a path that we're, you know, we're passing through gates in these multi-year plans to get to the sort of the promised land of, because, you know, we're talking, you know, 100 basis point improvement in [AS] post 12, you know, which puts us at a sort of, I don't know, call it 10+, I don't know what, how long you think the season is.
12 weeks.
Of like $200 million. This goes back to the core conditions of what do we do that adds value here and how do we drive the categories? It goes right back to, you know, what Alice, I think, was really sort of getting to, but it doesn't work. We think it will work. I have to completely trust that, number one, my finance partner and I are aligned and firm on the expectation of what the operating group needs to put out, and then a commitment by Barry that he's going to manage it. He's got a really robust management process he's using now. It's really the first time I felt we've had all those pieces in place to actually achieve it. Maybe if we just, I talk to my finance partner and then we hand it over to the operator who owns it.
Yeah. Sam, your question doesn't surprise me. What I would tell you is, in concert with what Jim said, part of my role is setting targets, linking those targets to how we compensate each other. I think I have an important role as well in enabling the success of these guys up here. My role in that is to first understand what's really driving the complexity in our business and are we appropriately allocating our cost to what that complexity is. These guys, with that visibility, need to increase their management of the demand for that complexity. If they see the cost over time, the idea would be reducing the demand of that.
The next role that I partially have, and I also have our IS resources, is to figure out how do we over time figure out how to reduce the cost of delivering the complexity that's critical to differentiating us as a company. That's the PLM example I provided, which we put in a new technology tool, never a vice saying where we put in a technology tool and it instantly is optimized. Now it becomes the harder work of how do you optimize that investment to drive the efficiency. I think, you know, consistently Jim said the role of corporate is to set the targets and enable the operators to drive this and then link it to performance management and compensation.
I think where we've had some difficulty in the past, we've always set targets, but those targets haven't been aligned with the initiatives and the capacity of what we have to actually get to those targets. What we've implemented for this year, and we've started this with our Board of Directors as well, is we set the targets, then we prioritize the initiatives, make sure that those initiatives are well funded, and that we're going to get those done, and we draw the line. There's a negotiation process that goes on that says, based on those targets, here's what we can get done this year. There hasn't been that capacity management in the past. My operating finance guy, Randy Coleman, said we set the targets, but then we try to be world-class at everything.
In the world of constraints, you can't be world-class at everything if you're going to control your SG&A. Now I think that target setting's happening and we're going through a very robust management process to make sure that the targets are aligned with what the expectation is. I think we're in a much better spot. We have, we talked a little bit about it at our table, we have 7,000 associates. What's important then, once those targets are set, we have the initiatives in place that all 7,000 associates are aligned with those and we know what we're trying to get done. I think we're doing a much better job of that.
If 2012 comes in better than expected on the top line because of a lot of the marketing initiatives that you haven't placed in new products, let's say you grow sales 10 or 12%, will SG&A on that overage then only grow 75%-85% of the upside, or is the leverage just pushed out in the out years? At what point do you begin to harvest what good you're doing on the marketing side?
You know, we spoke about that this morning as a potential question. To some extent, incentive will flex with the results. You'll lose some of the upside to the incentive. My view right now, I think, is what I want to say is the majority of, I think Dave's counsel was 50% of at least will flow to the bottom line. My view is that the majority of that will flow to the bottom line, and we'll feel really good that what we're doing is working. We'll just continue along the plan that we have. You will not see a huge push in sort of second half, we'll call it fourth quarter really for our company SG&A to sort of do a bunch of stuff with that money. We'll just feel more confident that the plan we've laid out will work. I mean, do you see anything different, Dave?
Question for the two Daves, actually. First, this time last year, we were just starting to talk about acquisitions. Now we've got acquisitions baked into the long-term guidance. Dave Evans, can you give a little color to how that's evolved? For Dave Swihart, I thought one of the reasons why we were not going to need as much pricing was there's a lot more urea capacity coming on in China this year. The urea should be topping out, but you kind of gave us a range for even 2013 that's twice what the lows were last year. Can you give us color of what you see there? Do we expect it to ever recede, or is this kind of the new norm?
I'll go backwards too, Swihart.
Yeah, the range is based on, there's many things that drive the market. One is supply and demand. The other is really as an input to crops. We expect, you know, that as an input to crops, that's going to continue to keep urea, you know, from dropping further. Because as long as, for instance, corn, if the farmers are able to get over $6 a bushel, they can afford to fertilize their corn with pretty expensive nutrients. That's where we landed on that guidance. Had supply not outpaced demand in the out years, we would assume an expectation that the trend would go higher.
Bill, with respect to acquisitions, this company was doing a lot of acquisitions pre-2007. When we recapitalized our balance sheet and took advantage of the credit market at that time, in essence, what we were saying is we're going to stay focused on organic growth and be inwardly focused to drive that growth for the years that followed that. Last year, we began the first signal that now we're starting to think about how do we start to leverage our unique assets to drive more acquisitive growth. I would say that trying to do that, we've done it in a very responsible way. We've been trying to build the resource, build the capability, and be very selective in how we think of that. What you saw in 2011 was actually just some very small deals.
One I'd say is fairly representative of what we're looking for, and it was in the Florida market. We acquired an asset that gave us access to a raw material source that enabled us to become a low-cost provider in that Florida market. That's the type of thing we're looking at. I would say we're looking at acquisitions of value monetarily that's consistent with our articulation use as a cash. We're looking at acquisitions that align with what Barry Sanders talked about are our growth opportunities. Close near-in adjacencies where we can take niche regional brands as an example and apply our scale and distribution to drive growth. Secondarily, geographic growth. We would consider acquisitive opportunities to accelerate our growth into Central Europe.
Third, we ended the day and Barry Sanders spoke briefly about lawn service and the opportunity to perhaps accelerate the test that we've been doing for the last couple of years on the insect side. These could be the types of acquisitions we're looking at. I would temper it that it's all within, it could be lumpy, but it's all within kind of our articulated strategies on the use of cash and debt leverage.
Dave, your 3% increase in SG&A through 2016. Could you take us through what your assumptions are in terms of healthcare, R&D, headcount, compensation to help get you there?
I think that might be beyond the scope of this particular discussion. We are assuming that we continue to invest in our brands. We have aligned key initiatives. I'd say some forward steps that we've made this year are to reduce the number of initiatives we have, properly resource those, and fund less of all the others that won't be critical to getting to our goal. The 3%, so yeah, there will be some costs that will grow inflationary-wise exceeding that. That's where, Jim, we're trying to line up. This is a four-year goal. This is a capability that, to Sam's point, hasn't been something that we've consistently done as an organization. What I think we're saying is we acknowledge, that's why I said I was expecting Sam's question, because we acknowledge the team that we're not going to get there behaving the same way and doing the same things.
That's why we're going to see some things grow faster than 3%. We have to make some other change. We're building some capabilities, and we're trying to align all this to drive that.
My question is, I guess, for the other Jim and relates to advertising spending. Jim, you mentioned earlier that you felt like the spend last year was not enough to engage all the battles that you needed to fight, and presumably some of those aren't competitive. Could you give us some more color on kind of how, as an organization, you arrived at an incremental $40 million as the right amount? To what degree should we consider this spending, you know, offensive spending versus defensive spending? Thanks.
I tried to walk you through some of the math around what we felt were minimal investments in any campaign that we ran. That was the first step that we did. Secondly, we looked for efficiencies via multimedia integrated approaches, as well as overall the ability of campaigns to carry the water for more than one product. We did all that math and identified that with the current set of products we were promoting, it was significantly more than $40 million. You saw that long tail chart that I had. As we started peeling back the investments in some of those small product lines that wouldn't support a breakthrough level of media, we started working with Brian Kiera on how we would support those via other methods, meaning, you know, promotion with the retailers or otherwise. We kind of bifurcated the product line that way.
When we rolled it all up, we think a minimum of an incremental $40 million was needed to fight the remaining fight that we had. As Jim's already articulated, we are looking to continue at this AS ratio plus grow the AS ratio over the lifetime of Dave's plan. That's how we did the math. The second part of your question was,
oh,
offensive. I think we've become significantly more offensive in the regard that I think Dave articulated. We spent a lot of time on problem solution advertising. What we really want to do is get into proactive behavior. That's the first piece of it. The second is that we know since we have 50% of the pie, growing the size of the pie is going to reap a higher ROI than growing the individual swipes.
We oriented most of the messaging you saw today, plug the Miracle-Gro you haven't seen yet on almost exclusively growing the category. Participation rates that somebody already asked a question about, as well as frequency rates. You'll see the advertising, I'd say at least two-thirds to three-quarters of the advertising all focused towards those objectives versus specific, you know, problem solution or product attribute objectives.
I think I have a question for Jim on management compensation. You stress volume growth and gross profit change. Should those metrics be adjusted for weather effects, or are they? In terms of improving return on capital, you have a naturally free cash flow generative business. The capital phase, in some ways, could at least in one dimension shrink. Should you adjust for that as well, or do you?
I'm not sure who asked the question, but if I tie it together with yours, this issue of incentive for 2012, because I just want to start on that one, which is it's very much a growth-oriented, because to me, if you look at units, part of how we have been looking at the business, and I take the blame for saying it's modestly superficial up till now, is revenue growth and sort of, you know, mid-low single digits, but growth in spite of some crappy environment. Margin rates up, market share up. You sort of say, it looked pretty good. Stock price up. If you back out pricing that we took when commodities went up and didn't give back, it was really good for the business, but it didn't drive much unit volume.
Part of this whole approach to kind of taking a time out, putting, I mean, Jim's right. The advertising number was me saying to them, what do you guys need? Tell me how much ammo you want to carry to battle, and I'll get you the money, and we'll do it without pricing. It's on the back of sort of earnings, but we have to show in 2012 that we can grow these businesses. The incentive scheme for 2012 may not be the same as for the rest of the plan, because what it's designed around for right now is showing the world, ourselves, that we can grow these categories and take the lion's share of that growth, which turns into market share.
What you're seeing is gross margin in there is just really kind of a, to some extent, a word we've been using internally, a lot of guardrail, to say you can't just completely exclude gross margin. Top line growth, market share are big deals for us in 2012. I think it's mostly to show that we can make a change. Do I think that there should be a weather factor? We spoke with my table. I have two board members. I don't know if they're both still here. I see my sister. We're making more and more because we're hearing more and more of this from the comp committees, consultant that we're putting more and more of our pay at risk. We're in the lawn and garden business, and sometimes you get crappy weather.
I'm less concerned about sort of banking gain, so when the results are really great, than I am the disruptive effect, like this ROIC goal, where we have performance criteria built into our long-term comp. We have a crappy year. You could lose a three-year slogan, right? I mean, you could use that one three-year period that's in the long term. You could get to a point, and it may be last year's grant was there. It was. It's unrecoverable, and you lose a pretty significant piece of your long term based on something that happens once in a while, which is just really terrible weather. My view is you go through it unhandicapped. You have a crappy year, you have good years, and it sort of fits into the mix.
To the extent I can't fight a battle with my comp committee I can't win, I just live with what the results are. I don't know if that's helping you for the answer. Do I think that long term, we need to have a somewhat more sophisticated number of metrics that are driving us to where we want to get to? Yes. For 2012, it's all about growth, and we only threw a couple of things in there to say, but not at any cost. I do think that the most important priority for us, particularly in, is lawn fertilizer growth in 2012, because remember, that's a high margin product for us. Everything is sort of driven against that. I'm not sure. Does anybody have anything they want to add on this?
I said two things. One is, this ROIC metric we have was consciously designed as a rolling trailing three-year average to take the volatility out so that you don't win or lose based on one snapshot result. That's point number one. Point number two, to your question on the composition of our invested capital, it is leveraged. What you shouldn't take away from this is that the metric is assuming we stand still. It requires, it's a three-year, so it requires growth in 2013 and 2014 to achieve the target metric.
I think the leverage on the ROIC is, let me just, before you run there, in the ROIC metric, there's much more leverage on the top part than there is on the bottom. While we probably can take some invested capital out in the form of inventory stuff, there's a lot more leverage on the top side than there is on removing capital from the business. I thought I heard Olivia's voice.
I have a question about your pricing strategy in China. Were your products priced at a premium product in China, how is your pricing in China compared to in the States for a comparable product? Thank you.
In China, the pricing is significantly less than in the U.S., but it is mainly driven by unit size. As Barry said, the average home has eight container pots. Some are as small as five inches; others are larger. They don't need as much product. Given the demand for space in the home, they don't want to store a lot. We're looking at a set of product lines that has a lot of single-use containers and small packages. The pricing point, I don't know the dollar value, but it's that $1-$2 U.S. dollar equivalency.
I just had a quick question about the Snap lawn care system product. Some of the points that came up today are half of a $40 million increase in ad spending will be for Snap. Snap is going to get bought as a replacement when durables occur. We're making an all-in bet on Snap, and that's caused retailers to get on board. How are you measuring success with this product? It sounds like you're not going to immediately see a lot of dollars, but you are pushing a lot of dollars at it. How are you going to feel confident that that investment is going to lead to good results in the end? As a consumer buying a $30 spreader, eventually, that only allows you to use one company's product or a certain type of product versus, I mean, as you say, they probably have a spreader now.
Why is that a good choice for me to make? A regular spreader is what, $20? I mean, I don't know how much a spreader costs.
I'll start backwards. If I start with this. Backwards, $29 up to $49 is the average, depending on feature, function, size, all that. That's the average price. How we know it's successful? We have a specific unit number. It's 200,000 units. We sell about 2 million spreaders a year. We have, Jim, around 80, 85 share, depending on the year. We'd like to see 10% of that. The way the business model goes, you know, it should start increasing from there. You can do the math on the way that the number of units and the compounding growth of that. It is specifically designed to only use our product. We sell 80%-85% of the spreaders, but we only sell about half the units and 60% of the dollars.
We think that the feature functions, simplification of use, no spreader settings, easier to storage, easier units to buy and to handle, and so forth, will entice the consumer to go into that category. The way we're looking at it, you know, we talk a lot about it, razor razor blade. It is going to be part of a, that's one of the things we learned is it's going to be part of a durable replacement cycle. You're not going to buy the bags until you buy that. Over time, as we can get 10% and increasing from there, the economics of that business model works very well. Do you want anything?
The only thing I'd add, the only thing that you left out, Barry, was the other metric by which we're measuring success is the number of bags purchased per unit. Already we're at three in first-year sales. Second-year sales are more than three, four plus. We don't know how high high is yet. That frequency of purchase, because they're not all the same application, the consumers buying multiple formulations, they're going to realize a better outcome, which we think will facilitate that already high customer sat rating. That's the other metric by which we're measuring.
To benchmark that against where we're at, the average consumer buys about a bag and a half of fertilizer. The frequency of application is significant compared to where we're at.
Hi, Carla Casella from JP Morgan. A follow-up question on the Florida, your comments earlier about the Florida and Texas markets and how well they're doing early part of the year. How does that compare to two years ago? Are you back to a normal run rate or are you above a normal run rate? Was last year just an unusual dip in the first part of the season?
Yeah, so last year was unusually bad. I wish Sam was still here. He would say last year there was no spring. It went straight from winter. This year there's been no winter, and it's just been phenomenal in Florida. Last year started the drought in Texas. There's still a drought in Texas, but they are getting rain. What we're seeing is the drought doesn't have to recover. Just any incident of rain, or Jim showed you the numbers, 50% up, any incidents of rain, the consumer is out repairing their lawn. In both cases, it is up compared to last year, and I would say on a long-term trend line, slightly higher than we have expected on a long-term, you know, compounded growth rate.
Okay, great. You mentioned moving more into some of the channels where you're underpenetrated, like hardware, mass merchant, grocery. As you move into those channels, are those typically a lower margin or a more promotional business than your current, more of a home center?
Actually, no. You know, we're not paying slotting fees. The cost to service those channels is, quite frankly, less. We're not doing as much in-store service, so the business model of going in there is margin accretive. What we're also seeing is the frequency of visits to the store is a large part of what's driving the unit volume in those as well.
Anything else?
I just, you know, I'd add that I hear you. I also think that success in those channels, you know, the SDJ deal for us is a really good deal, and it's decent money. That being said, it's all kind of low-hanging fruit right now for both companies because I don't think we have designed any products for grocery as a result of discussions with SDJ's sales group yet, and they haven't designed any products that we would want for the uniquely different sort of DIY big box channels that we're going into. That's going to have to happen, and there'll be some cost to that. I'm not trying to spill cold water or anything. I think that to make progress in here, it's a little bit like the advertising investment.
It's going to be an investment, and that doesn't mean it's not a quick payback, but it does mean that the better we get at sort of exploiting these channel opportunities, whether it's clubs, hardware, garden centers, grocery, drugs, are going to require us to do the work necessary to succeed in those channels. Without doing that work, there may be some quick, easy gains, but they'll be short-lived because there isn't a level of sort of commitment you have to put to these categories or these channel opportunities that we're going to have to show a sustained effort behind in order to exploit. I do think the first, this early work we're doing has been pretty successful. You know, you saw some of the products up there, whether it was Whitney Farm on what we were talking about in independents or Osmocote brand Durr, that it's been really successful.
This is really a sign that we're committed to these channels. We're giving them the tools to succeed, and we just have to keep behaving this way because that would be pretty destructive if we weren't.
Okay, I think we're done. Do you want to wrap up?
Oh, I mean, listen, we've lost a group of people, about 50% of Scotts people at this point. I just want to say that I'm pretty excited about the year. It's a good place to start. It's not, you know, when you're 25% or more into a season, you're not joking around anymore. The Florida market is happening. Texas is happening. Arizona is happening. California is beginning to happen. Things are looking pretty good so far. Management team is, I think, highly aligned. I want to give credit to sort of everybody and more that are on the stage to saying a lot of what I have been talking about is deeply embraced by this group of people. They're executing against it. I think that if ever there would be a criticism of us, it would be that our talk didn't always turn into the walk.
I think that we're in a really good place. Finally, I want to thank everybody here who's been around for a while for their support of the business. We got a really cool thing going. If we could sort of get our head together, and you know, it's been a tough ride. These commodity increases and the sort of wackiness of the economy, forget the weather, has just made things a little harder when you have sort of a dollar a share of commodity problems that come and go. It's hard to sort of deal with it. I think you've got a good management team, and I think we really liked working with the street. I don't find working with you guys to be a hassle at all.
By the way, anybody who wants to do stall walks, King will probably kill me, but anybody who wants to do stall walks.
Let me know.
No, no. If he doesn't get them to happen.
I'll get them to happen.
7001 is my phone number. Just call directly and we'll get you guys out in the street and see what's happening, because it's going to be a cool year. Okay, Barry, do you want to?
No, I think I'd start with, finish with where I started. It feels like we're at a new stage of the journey of our story. I think this is an exciting time. We're at the front end of what I think these opportunities are. We were talking at our table, I think a decade from now, just like we are now, looks substantially different than where we were a decade ago. The mix, the profitability, the nature of our business will be that much better over the next decade.