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Best of Liz Benston

Gaming Guru

Liz Benston

Herbst family looks south

16 April 2007

Thirty years ago the Herbst family, busily running its chain of gas stations, considered buying the three casinos in Primm, the desert burg that greets Southern Californians crossing into Nevada. They thought about it for about as long as it took to drive past the place.

The state line casinos, they concluded, were little more than a pit stop on the way to the Strip, just 45 minutes or so up the road. Who would pull off the highway unless they had some urgent business to tend to?

A lot of smart casino bosses still wonder that.

But the Herbst boys finally decided they had some business to tend to in Primm. They bought the three casinos last week for $400 million.

Why now? There was just no more denying that there was money to be made, even with the supposedly loose slots, free gas for gamblers and $7 prime rib dinners.

This was a family that knew how to turn a profit on a low-rent property past its prime.

"This is going to be a new beginning for the properties," said Jerry Herbst, the father of the men who now run Herbst Gaming, a company that began with a Chicago gas station in 1938.

In their glory days, before competition intensified from Southern California's tribal casinos, revenue from Primm's casinos - Whiskey Pete's, Primm Valley and Buffalo Bill's - equaled that of a midsize Strip casino. Earnings have plummeted by about 60 percent since their peak in 2000.

That doesn't bother the Herbst brothers, who grew up in an industry where profit is measured by a few pennies per gallon.

Patriarch Ed Herbst launched the family's gas station empire in the 1950s, then pared it back after the oil crisis and focused on Nevada. In the 1980s his grandsons Ed, Tim and Troy introduced slot machines to their gas stations, which already offered food, lube jobs and car washes.

Soon, the time-consuming business of collecting slot machine coins around town spawned another success: Herbst became the largest operator of slot machines in Nevada without a casino.

The Herbsts initially worried the gas station slot machines would encourage loitering, which would be bad for business. Combining video poker with accessible cigarette s, hot dogs and Cokes proved a powerful marriage. The Herbsts now operate more than 13,000 slot machines throughout the state, most in convenience stores.

The company began buying and building casinos in the 1990s, beginning with smaller casinos in Pahrump and Henderson.

The company's biggest splash was in 1999, when it bought the dumpy, smoke-stained Continental, a bankrupt hotel near McCarran International Airport. They gutted the hotel, remodeled it and reopened in 2000 with the company's ubiquitous "Terrible Herbst" cowboy logo, $29 rooms and a gaming floor packed with slot machines.

The place jumped alive with locals who liked the casino's convenience-store approach to gambling, where cheap eats and beer are but a few steps away from video poker machines.

"They don't just buy something and sit on it. They do a huge number of drawings and promotions," said Jeffrey Compton, a local marketing consultant. "They like a full casino, and they do everything they can to keep it that way."

It's a high-volume, lower profit margin business - the kind that nicely fits a family steeped in the grind of the gas-station industry. And it's the antithesis of the business plan embraced by MGM Mirage, which sold the Primm casinos to the Herbsts, applying the proceeds to its massive CityCenter project on the Strip.

The casino purchases "could not have come at a better time" to cushion the financial blow sustained by the family after voters in November approved far-reaching smoking restrictions, said Dennis Farrell, a bond analyst with Wachovia Securities.

Herbst Gaming was a primary opponent of the measure, which banned smoking in small slot machine outlets such as food-serving bars, convenience stores, gas stations and grocery stores. Herbst executives say slot route revenue has declined as much as 20 percent because smoking gamblers have taken their business to neighborhood casinos.

Operating profit from the company's slot route fell 4 percent last year, while casino earnings, boosted by the purchase and remodel of three Midwest casinos, rose 5 percent. The company's slot route, with more than 8,000 machines in Nevada, accounts for about 60 percent of the company's revenue but has been a declining percentage over the years as the company has acquired casinos.

Profits at the Primm casinos may never return to their heyday, but tourism data show that average daily traffic across the border has risen 6 percent since 2003, when profit bottomed at Primm.

"You have to believe in the Las Vegas economy," President Ed Herbst said.

Snagging a fraction of the estimated 40,400 cars that crossed the I-15 entrance into Nevada each day last year is only part of the plan.

The Herbsts also plan to market the Primm casinos to locals for weekend getaways and midweek activities.

The Primm casinos will be promoted at the family's 100 or so gas stations across the Las Vegas Valley, linked to its Terrible's slot club and be refreshed with new coinless slot machines.

The brothers also want to drum up business by hosting motor sports (car racing is the family hobby), major entertainment acts and business conventions.

With the development of the Ivanpah Airport near Sloan over the next decade and the prospect of residential neighborhoods stretching farther south of Las Vegas along Interstate 15, "Primm isn't as far away as it used to be," Ed Herbst said.

The Primm casinos already are popular with gamblers who will visit the Strip but prefer the $50 rooms at the state line and a 45-minute head start home on Sunday.

Still, Primm won't be easy money for the Herbsts.

"This is a very challenging market segment," Jerry Herbst said. "It's important to make the right decisions in a timely manner."

"It's like spokes of a wheel. You need all of the spokes to make it work," Ed Herbst added. "You need the off-road crowd, the retiree crowd, the gamer crowd, the California crowd."

And to people who aren't hungry or don't want to gamble, they will, of course, sell gas.