Roto-Rooter Corp.

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Roto-Rooter Corp.

255 East 5th Street
Cincinnati, Ohio 45202
(513) 762-6690
Fax: (513) 762-6590

Subsidiary of Chemed Corp.
Incorporated: 1935 as Roto-Rooter Inc.
Employees: 1,550
Sales: $171.9 million (1994)
Stock Exchanges: NASDAQ
SICs: 7699 Repair Services, Not Elsewhere Classified

With 17 percent of the market for drain and sewer cleaning service, Roto-Rooter Corp. is this industrys indisputable leader. Richard Phalon of Forbes magazine called the business one of the U.S.s most successful small companies in 1989, and his assessment continued to ring true through 1994, v/hen Roto-Rooter chalked up its tenth successive year of record results. Family-owned and operated from its inception until 1980, the Iowa firm was sold that year to Cincinnati-based Chemed Corporation. Chemed transformed the company from a loose amalgamation of independent operators into a modern franchisee system, then proceeded to buy out many of the largest licensees. By the early 1990s, Roto-Rooter had purchased so many of its franchisees in major metropolitan areas that franchise fees constituted less than ten percent of annual revenues. With the support of its new parent, Roto-Rooter expanded into plumbing and general maintenance service in the mid-1980s. Although general maintenance had grown to contribute over one-third of annual revenues by 1994, Roto-Rooter announced in 1995 that it would divest that business. Although Roto-Rooter was counted among Chemeds subsidiaries in the early 1990s, about 40 percent of its stock was publicly traded.

Roto-Rooter was founded in 1935 by Samuel Oscar Blanc in West Des Moines, Iowa. Born in Wisconsin in 1883, Blanc had been forced to quit school in the fifth grade, when his father committed suicide. He traveled throughout the Pacific North west working as a lumberman and telephone linesman during the first decade of the Twentieth century, returning to Wisconsin in 1906 to marry. Blanc had taken a variety of sales jobs over the course of the ensuing two decades, but like so many others in Depression-era America, was limited to odd jobs by the early 1930s. Little did he know that a backed-up toilet would lead to a permanent career.

In 1934, Blancs son, Milton, asked for help unclogging a sewer system blocked with potato peelings. Together they used a length of flexible metal cable to free the clog, prompting the father to seek a better way to do the job. Having taken correspondence courses in electrical and mechanical engineering, S. O. Blanc spent the next few months developing an electrically-powered drain cleaner that featured a rotating steel coil with blades at one end to cut through virtually any blockage, even tree roots. Blanc knew he had a great idea on his hands; the alternative was to dig a trench along the pipes, find the clog, and clear it. Before the year was out, he had started advertising his service and applied for a patent on his device. Wife Lettie came up with the name that would become the companys most valuable asset: Roto-Rooter. The firm was incorporated in 1936, the same year Blanc registered his trademark.

The foundation of the companys nationwide franchise system was laid early in 1935, when C. W. Crawford wrote asking to rent a Roto-Rooter and start his own business. That first contract, for $400, bought an exclusive, four-county territory for the life of the patent, but the agreement was soon revised to five cents per sewer in a given region. Within two years of its first lease agreement, Roto-Rooter had licensed more than 100 territories from Florida to Washington, with a concentration in the Midwest. The central organization manufactured drain cleaning machines and replacement parts and provided a minimal amount of technical and managerial support to licensees.

But franchising fees alone were not enough to support ongoing patent and trademark registration and defense of those intellectual properties. In 1936, Blanc set up a separate operation, Roto-Rooter Service Company, with an entirely new modus operandi. Instead of licensing territories, this business essentially employed individual contractors in New York City, Boston, Baltimore, and other east coast cities. Headquartered in Iowa, the central organization supervised advertising (but little else) in exchange for a percentage of each contractors receipts.

By 1938, when Blanc received a patent on his original design, company machinists had developed an industrial-sized drain cleaner called the Royal Street Sewer Cleaning Machine as well as a kitchen-sized model dubbed the Niarddrain spelled backwards.

Blanc realized that the Roto-Rooter concept was terribly easy to reproduce. Although he continued to defend the physical design throughout the life of the patent, he began in the early 1940s to put more support behind the Roto-Rooter trademark through advertising in such nationally circulated publications as Better Homes & Gardens. Up to this point, the vast majority of advertising had been underwritten by individual operators.

Although World War IIs raw material shortages stunted Roto-Rooters expansion, postwar rural electrification and water works projects furnished seemingly endless growth potential. Eric Peterson, grandson of S. O. Blanc and author of a 1988 company history, characterized this period as a time of unimaginable prosperity. By the mid-1950s, Roto-Rooter had operations in virtually every city with more than 100,000 people. The company established its first international franchise, in Mexico City, in 1945, and shipped machines to Brazil in 1952. In spite of these early efforts, international operations remained negligible until the 1970s.

Roto-Rooter reached a critical juncture in 1955, when the patent on the original device expired and the company was reorganized around the Roto-Rooter trademark. The central organization decided at this time to charge a higher franchise fee based on the number of people served in a given region. In spite of the upheaval, the firm lost less than ten percent of its 300 franchisees. Roto-Rooter followed up the reorganization with a new national advertising campaign featuring the ditty that would help establish the brand as Americas most recognizable sewer cleaning service. Recorded by Captain Stubby and the Buccaneers, the snappy jingle, Roto-Rooter, thats the name, and away go troubles down the drain, became one of U.S. advertisings most memorable and enduring taglines.

Notwithstanding the outward appearance of success, several endemic problems began to manifest themselves during the 1960s. Perhaps the most fundamental of these was what Eric Peterson called a management vacuum; Roto-Rooters founding executives had never really provided much guidance to franchisees or expected much more than fees from them, and, by the 1960s, many top leaders were reaching retirement age. At the same time, a growing body of antitrust law endangered the companys loose franchise system, the threat of takeover loomed large, and corruption in some operations (especially those in the Service Co. segment) endangered Roto-Rooters future.

When founder S. O. Blanc died in 1964, his son-in-law, Russell Young, was elected to succeed him. (Blancs own son, Milton, had not been significantly involved in the company.) The change in leadership, however, did not necessarily herald new management practices. The company moved into a new West Des Moines headquarters and built a new factory, but little else about Roto-Rooter changed in the late 1960s.

Roto-Rooters corporate lethargy ended in 1970, when another of S. O. Blancs sons-in-law, Henry Peterson, advanced from secretary to president. Unlike most of the companys aging executives, Peterson brought varied outside experience in law and banking to the business. He hired new managers, instituted modern inventory controls and production schedules, automated the companys antiquated manufacturing methods, and spurred new product introductions.

Peterson also began to investigate lagging returns from the Roto-Rooter Service Company, which had been presided over (but not closely supervised by) Russ Young since its inception. The subsequent examination uncovered an organization rife with corruption; individual contractors were not reporting their gross sales accurately, sometimes keeping 90 percent of their receipts instead of the 50 percent they were contractually allowed to retain. Peterson oversaw a reorganization of the Service Company, converting it from a contractor basis to a more traditional service company with regional managers and local employees. At some point, he also changed the affiliated firms name to Nurotoco Inc. (new roto co). The cleanup helped quintuple Nurotocos profits within seven years and make it Roto-Rooters primary revenue generator. In the meantime, the number of traditional franchisees had nearly doubled from 425 in 1969 to more than 700 by 1979.

Peterson had snatched Roto-Rooter from imminent decline, and by the end of the 1970s he was ready to retire. But no one in the next generation of the Blanc family had shown interest in accepting the mantle of leadership. Peterson had actually begun researching the sale of the company in 1975, but was impeded by litigation and reorganization concerns from concentrating on the issue. In 1980, Peterson was able to negotiate a $23 million cash/stock deal with Cincinnatis Chemed Corporation, a manufacturer of specialty materials for the chemical and medical industries.

Chemed moved Roto-Rooters headquarters from West Des Moines to Cincinnati and imposed modern standards of franchise management on the corporate system. A revised franchise contract proposed by newly appointed president and chief executive officer William Griffin opened franchisee books to corporate review, reserved right of first refusal for Roto-Rooter, and prohibited interfranchise competition. New across-the-board standards included 24-hour service, employee training in customer service, uniforms, and logo-emblazoned vehicles. Chemed also began to buy back licenses in the largest metropolitan areas, transforming them into employer-employee operations much like those of the east coasts Nurotoco. By the end of the decade, Roto-Rooter Inc. had purchased 39 such territories. Despite initial resistance from operators, these changes brought a higher level of standardization to the organization, benefiting the parent company, the franchisees, and their customers.

Chemed made a private placement of 15 percent of Roto-Rooters stock in 1984 and raised $12.5 million in an initial public offering of another 23 percent stake the following year. (Chemed had been spun off to the public by its own parent, W. R. Grace Co., in 1982.) The proceeds of these sales were used to expand Roto-Rooters roster of services through internal growth as well as acquisition. Roto-Rooter had made its first reach into plumbing services in 1981; by mid-decade this sideline was contributing about ten percent of annual sales. Chemed also expanded the subsidiarys industrial and municipal drain cleaning services. But an initial venture into heating, ventilation, and air conditioning (HVAC) was not as successful. Roto-Rooter acquired Apollo Heating & Air Conditioning Inc., an Ohio service company, in 1986, but when the division did not pan out, it was sold to its management team.

Roto-Rooter experienced phenomenal growth under the guidance of its new parent. Sales multiplied from a mere $4.7 million in 1980 to $66.8 million by 1989, and net income grew to more than $5.5 million.

Roto-Rooters growth strategy for the early 1990s included expansion of service to restaurants and motels, a reentry into the HVAC segment, and addition of general maintenance services to the roster. From 1991 to 1993, the company acquired three businesses in Florida and Arizona that offered residential customers annual maintenance contracts for many major repairs, ranging from heating and air conditioning systems to major appliances and plumbing. These operations were combined in 1994 under the Service America trademark. But as the middle of the decade approached, the future of this business segment was uncertain. Roto-Rooters 1994 annual report noted a plan to offer HVAC services under the name PEAK in 10 company-owned markets. A 1995 report by William Blair & Co., however, stated that Roto-Rooter had decided to exit the [general maintenance service] which had grown to contribute over 35 percent of revenues by 1994. Although the company had captured only two percent of the U.S. plumbing service market, this was its fastest-growing business segment, increasing by 20 percent from 1993 to 1994.

By the mid-1990s, Roto-Rooter had purchased 80 of its largest franchisees. The company still had 550 independent franchisees, but these businesses only contributed $6 million of 1994s $171 million in revenues. Whereas annual turnover had more than doubled from 1990s $75.2 million to 1994, net income expanded about half as fast, from $5.7 million to $8.8 million during the same period.

Principal Subsidiaries

Service America Systems, Inc. (70%); Roto-Rooter Services Co.; Roto-Rooter Corp.; Roto-Rooter Management Co.

Further Reading

Jaffe, Thomas, Two for the Stocking Forbes,January 11, 1988, p. 266.

Labate, John, Companies To Watch: Roto-Rooter, Fortune,June 27, 1994, p. 103.

Paton, Huntley, Roto-Rooter Sells Apollo to Management Group, Cincinnati Business Courier,March 13, 1989, p. 11.

Peterson, Eric Gregory, Roto-Rooter, 1935-1988,Michigan State University: M.A. Thesis, 1988.

Phalon, Richard, Roto-Rooters New Drill, Forbes,December 11, 1989, p. 176.

Roto-Rooter Boosts Net 20%, Completes Encore Acquisition, Contractor,August 1993, p. 16.

Roto-Rooter Continues Growth as Residential Service Giant, Contractor,April 1995, p. 8.

Sheets, Ken, When Boring Stocks Are Beautiful, Kiplingers Personal Finance Magazine,February 1995, p. 81.

Sword, Doug, Roto-Rooter Plumbing Services To Boost 86 Sales, Cincinnati Business Courier,August 18, 1986, p. 1.

Weinstein, Marc, Roto-Rooter Stock Flying High, Cincinnati Business Courier,June 24. 1985, p. 1.

April Dougal Gasbarre