Donut Bar founder, though, says new franchise stores continue to open, including one in Pacific Beach over the weekend
More than a year after San Diego-based Donut Bar awarded franchises for nearly a dozen new locations, three stores already have closed, and yet another, which was under construction, never opened.
The abrupt closings over the last month of Donut Bar franchises in Chula Vista and Scottsdale, Ariz. and an earlier shuttering in Pasadena come as the young franchising operation opened a new outlet in Pacific Beach over the weekend.
In the wake of the closings, three of the franchisees have filed an arbitration case against the Donut Bar franchising operation — Sweet Assets Franchise Group — alleging fraud and misrepresentation and violation of the California Franchise Investment Law.
Filing the claim were individual operators of the Chula Vista and Scottsdale stores, as well as the franchisee who had planned to open a store in Oceanside but halted the project mid-construction.
In a statement released by their attorney, David Levaton, they accused Sweet Assets of failing to disclose, among other things, “claims we feel were misleading and improper as to the costs of getting into the business and the financial performance of the business.”
Not a party to the joint arbitration case is the operator of a former Pasadena Donut Bar, which made its debut last November and just as quickly closed. It later reopened as Lêberry Bakery. The owner, Jennifer Le, said she went through a mediation process and in January reached a confidential settlement agreement. For that reason, she said she cannot comment further.
The four stores were among 11 locations for which franchises were awarded in June of last year. Of the 11 planned locations, only one is now open — the just opened Pacific Beach store. However, two more openings are planned before the end of the year — a store in Riverside and another in Tucson, said Donut Bar co-founder Santiago Campa.
Campa said he plans to take over the leases for the locations in Scottsdale and Eastlake area of Chula Vista and will convert them to corporate stores. The flagship Donut Bar, which opened in 2013 in downtown San Diego, has remained popular over the years and is known for their oversized gourmet doughnuts.
Plans for other franchises, including previously announced locations in North Hollywood and Anaheim, are still on track but no specific leases have been identified, Campa said.
“We’ve really been set back by our operators who went in there and unfortunately didn’t have the skin in the game that it takes to operate a restaurant,” Campa said in an interview. “They didn’t put in the work. Everything was filed with the state of California properly, there has been absolutely no fraud, absolutely no disclosures made improperly and we are in full compliance with the state of California.”
Sheley Brien, who operated the Scottsdale Donut Bar, immediately rebutted Campa’s claim that she had not invested the kind of work needed to make a new franchise successful.
“I spent 20 hours a day for the first 60 days and then backed it down to 12 hours a day,” said Brien, noting that her family, frequent visitors to San Diego from their Arizona home, had “fallen in love with the Donut Bar brand” before deciding to open a franchise. “This is yet again another example of his misrepresentations. Being there working as a team is what had us meet our revenue goals and exceeded it.”
Because she is currently in arbitration, Brien was circumspect as to what specifically led her to close the Scottsdale store, beyond her claim of fraud. She was, however, very vocal about the financial toll the investment has had. Building out her 2,500-square-foot store cost considerably more than the maximum $600,000 cost Campa estimated in an interview last year.
“I left corporate America to do this investment, and at the end of the day I put my life savings into this,” said Brien, whose background is in sales and marketing. “Do you think this is the position I’d ever want to be in? I’ve lost everything, and now I have debts from something where this was not my fault.”
Campa claimed that the Scottsdale operation had not paid rent “from day one,” an assertion that Brien said she could not comment on “because of our significant legal dispute with Santiago and Sweet Assets re: fraud and misrepresentation.”
Like Brien, Elizabeth Dewaghe, who said she spent $800,000 to open the Eastlake franchise in June, said her family has been left financially devastated. Dewaghe also said she was unable to elaborate on the specifics of the closure.
“I love the store, we had the best employees,” said DeWaghe, a clinical researcher by profession. “We’re just a husband and a wife, two kids. Why would we open a business if we were going to close in five months and throw away all our money?”
Both also complained about restrictions in their ability to create social media accounts for their individual stores, making it hard to market the franchises. Campa responded that he wanted to retain control over social media marketing for the brand.
“We’re taking our lead from the national franchises such as the McDonald’s and the In-N-Outs of the world,” he said. “They all have one social media handle.”
In addition to soured relationships with some of his franchisees, Campa also had a falling out with a consultant he brought on a couple of years ago as CEO of Sweet Assets to launch the franchising effort. That partner, Scott Jewett, filed suit last year against Campa and partner Wendy Bartels, along with Sweet Assets, alleging breach of contract and conspiracy to commit fraud. The lawsuit, Jewett said, arose out of “a corporate governance dispute” and “breach of employment contract,” among other claims.
The legal dispute was eventually settled out of court, with neither party admitting wrongdoing.