Cheryl Hall from Dallas News reports that Donald and Barry Zale found a huge hole in their doughnut strategy: financing.

Donald, the 75-year-old former chief executive of Zale Corp., and his son, Barry, entered the hotly contested fast-food and coffee market 14 months ago with plans to build 70 Dunkin’ Donuts stores in North Texas.

“We had a wonderful line of credit that would have taken us to about 20 percent of our goal – 14, 15 stores,” Donald says.

The accent is on had and would have.

The Zale company, Texas Donuts LP, had four units open and three more in the works when that financing was yanked last fall.

“Lines of credit for all franchising simply collapsed,” Donald says. “I don’t remember exactly how we found out, but the message came through loud and clear: ‘Hey, don’t go building any more stores, because we don’t have any more money for you.’ ”

So the Zales, better known for sparkles than sprinkles, recently sold back their franchise territory and four stores to the Canton, Mass.-based company under amicable terms, Donald says. “We told the guys at Dunkin’ that we could run 400 stores or 40 stores and be profitable. But we couldn’t run four and make a profit.”

What about the lawsuit Texas Donuts filed against Dunkin’?

“That was just to preserve jurisdiction in Dallas in case we had to go to court,” he says.

The Zales were supposed to be part of a three-pronged Lone Star invasion by Dunkin’ Donuts. Now the Dunkin’ faithful may have to wait longer than they hoped.

Richard Gussoni, restaurateur and owner of Culinaire, a $75 million Dallas catering company, says he’s moving forward with plans to build Dunkin’ stores in Collin County, northern Tarrant County and Austin, but at a slower pace.

“The capital for big expansion just isn’t there,” says Gussoni, who has six Dunkin’ Donuts stores open. “But even in this downturn, we’re looking for real estate that would suit our needs. We have three [larger] flagship stores – two in Austin and one in Hurst – that are doing dynamite for us.”

Bitter and sweet

Dallas businessman Michael Weinberg, who heads D3FW Operating LLC, has opened four stores and a unit in a Wal-Mart.

Recession is proving to be a mixed blessing, Weinberg says. Real estate is cheaper and existing sites are opening up, but bank financing is extremely hard to pin down. “People are eating the doughnuts. That’s not the problem. Banks don’t want to lend on anything right now. That’s our frustration.”

The folks at Dunkin’ Donuts headquarters say the company is committed to a “steady and strategic expansion” in North Texas and is looking for experienced operators.

Margie Myers, senior vice president of global communications for Dunkin’ Brands Inc., says the four stores acquired from the Zales have posted significant sales increases in the six weeks since Dunkin’ has owned them.

The more, the merrier

So what have the Zales, who’ve also invested in Blockbuster franchises and previously in Palm Beach Tan salons, learned about the quick-service food trade?

Size matters – even more than they thought. Operators need to be large-scale immediately to generate enough money to compete with “everyone who’s on television all day long – Sonic, Jack in the Box, McDonald’s. You have to be out there constantly hustling. You’ve got to sell a lot of coffee. You’ve got to sell a lot of everything,” Donald says.

What’s next?

Donald says he’s been talking with venture capital buddies who are doing workout deals for banks with troubled assets. They need retail expertise. “I’d love to do something like that.”

And his family’s corporate namesake has been seeking his counsel.

“They invited me out to visit with them two weeks ago. It was really fun, and they treated me very nicely,” says Donald, who hasn’t exactly been an insider since the buyout of Zale Corp. in the late 1980s. “Jack Lowe [who became Zale chairman 18 months ago] is a good friend of mine.”

As for Barry, he’s running the family’s seven Blockbuster stores – five in the Northeast and two in Arkansas.

He has an iron in the fire that he’s not willing to talk about yet. “If that falls through, then I’ve got my backup plan to start playing with sparkly things again,” he says. “And no, I’m not talking about sprinkles on doughnuts.”

Dallas News