Chemed Corporation, the parent company of both VITAS Healthcare and Roto-Rooter, recently reported a solid first quarter of 2024 with VITAS significantly outperforming expectations. However, beneath the surface of this seemingly positive report lies a concerning trend at Roto-Rooter - a persistent decline in call volume, particularly in the commercial sector. While Chemed attributes this to a general economic slowdown and consumer sentiment, a deeper dive into the Q1 2024 earnings call transcript reveals a potentially more insidious culprit: Google's ever-changing search algorithms.

Chemed CEO Kevin McNamara described the situation as a "new battle" being fought on the digital frontlines, likening it to the demise of the Yellow Pages, where Roto-Rooter once held a dominant position. Google's algorithmic shifts have created a "spreading of the meager number of calls" across a wider array of competitors, making it harder for Roto-Rooter to capture valuable leads.

To combat this, Roto-Rooter temporarily increased spending on paid advertising, a tactic McNamara likened to "desperate times" requiring "desperate measures." The outcome? Disappointing. Despite aggressive bidding on paid search, the increased expense failed to generate a commensurate return in call volume, ultimately impacting Roto-Rooter's margins.

While McNamara expressed confidence in Roto-Rooter's ability to adapt and reclaim its digital dominance, the transcript paints a picture of a company grappling with an external force largely outside of its control. The reliance on Google, the undisputed king of search, has become a potential Achilles' heel, exposing Roto-Rooter to the capricious whims of algorithms that can significantly impact its bottom line.

Could Google Be Prioritizing Paid Advertising Over Established Brands?

Here's the potential hypothesis: Could Google's algorithm changes be intentionally prioritizing newer, smaller plumbing companies that are more reliant on paid advertising, effectively creating a pay-to-play environment and squeezing out established players like Roto-Rooter?

The numbers tell a compelling story. Roto-Rooter's call volume has declined for four consecutive quarters, with the fourth quarter of 2023 experiencing an 18.7% drop compared to the prior year, even after adjusting for unusual weather events. This suggests that the issue extends beyond temporary economic headwinds. Furthermore, the admission that Roto-Rooter is spending "$1 million a month more" on Google marketing than a year ago, yet seeing meager returns, raises serious questions about the effectiveness and sustainability of this strategy. (Reference: Chemed Q4 2023 Earnings Call Transcript)

Commercial Sector Feeling the Squeeze

The commercial sector is particularly vulnerable. Roto-Rooter's commercial revenue plummeted 10.5% in the first quarter of 2024, a "disappointment" acknowledged by Chemed. The pandemic, coupled with economic uncertainty, has emboldened some commercial customers to experiment with alternative plumbing providers, potentially lured by lower prices in a challenging market. This shift, combined with Google's apparent preference for smaller, paid-advertising-dependent companies, could create a perfect storm that further erodes Roto-Rooter's commercial dominance.

The Potential Impact on Roto-Rooter

The potential consequences are significant. If Roto-Rooter continues to struggle with declining call volume, it could face a difficult choice: accept lower margins to remain competitive in a pay-to-play environment or risk further market share erosion. While Chemed remains optimistic about Roto-Rooter's long-term prospects, the company's near-term success hinges on its ability to navigate this treacherous Google-shaped landscape.

Roto-Rooter's Call Volume Decline

The following chart illustrates Roto-Rooter's declining call volume over the past four quarters.

The "new battle" being waged on the digital frontlines is one that Roto-Rooter cannot afford to lose. Its success in adapting to Google's evolving algorithms will determine whether it can escape the silent killer lurking in the Google graveyard or become another victim of its capricious grip.

"Fun Fact: Roto-Rooter was founded in 1935 by Samuel Blanc, who invented a sewer-cleaning machine to clear roots clogging the sewer lines of his son's apartment building. The invention was so successful that Blanc eventually franchised the business, creating the nationwide plumbing empire we know today."