Executive Insights | May 2012 | By Barney Wolf

David Novak’s Global Vision

How the CEO and chairman of Yum! Brands is still dedicated to growing the world’s leading restaurant brand.

Bookmark/Share this post with:
Email this story Email this story
Printer-friendly versionPrinter-friendly version

Read More About

The photos are the first thing people notice when they walk into David Novak’s office.

Hundreds of pictures cover the walls and even the ceiling. They show Novak, Yum! Brands Inc.’s chairman and CEO, with smiling restaurant managers, office staffers, and other employees honored for noteworthy achievement.

The winners get more than just a picture. They also win cash and the Yum! Award, a set of plastic smiling teeth with legs, denoting they “walk the talk” of leadership.

It’s the latest incarnation of a lighthearted employee-recognition award that Novak began in the mid-1990s—back then it was a floppy rubber chicken—when he was president of KFC, one of Yum’s three global brands along with Pizza Hut and Taco Bell.

The current award is often signaled by the appearance of a band that roams the halls of Yum’s three-story, colonial-style headquarters—dubbed the White House—in Louisville, Kentucky, looking for people who have excelled.

“We have a lot of fun with our individual recognition awards,” says the casually dressed, 59-year-old Novak, who oversees a massive system of 37,000 restaurants and 1.4 million employees in about 120 countries. “You need to tell people you appreciate them.”

Motivating employees is important to any company, and Yum’s boss made that a key point in his recently published book Taking People with You, a guide for successful leadership based on principles Novak developed during his years at the company’s helm.

“It’s an action plan of how you take the single biggest thing you’re working on and actually get it done,” he says.

The book—a mix of personal experiences, observations from other CEOs, and practical lessons—became an instant hardcover business best seller.

Blurbs of praise for the book include one from the Oracle of Omaha, Warren Buffett, who called Novak the “best at leadership whether teaching it … or practicing it.”

One reason Novak wrote the book “was that I’ve been teaching this for 15 years, but I’ve only reached 4,000 people,” he says, just a fraction of Yum’s worldwide leadership.

Now he’s expanding the book’s concepts to the entire enterprise by making 2012 “the year of taking people with you for operational excellence.”

The book’s tenets have been converted into a training guide to help Yum franchisees, restaurant general managers, and operating leaders select the biggest thing they’re doing to drive operational improvement and develop a plan to accomplish that.

“This will be cascaded all around the world,” he says.

That’s no overstatement. The manual was created in eight languages, which says something about how Novak has built Yum’s international presence.

In fact, most of Yum’s profit and growth come from outside America. Since being spun off from PepsiCo in 1997, Yum has seen profits from its overseas operations soar from 20 percent of company profits to more than 70 percent last year.

China alone contributed half of Yum’s $1.8 billion operating profit during 2011. Another 5 percent came from emerging markets like India, Indonesia, and Vietnam.

The result: The company last year chalked up net income of $1.3 billion, or $2.74 per share, on revenue of $12.6 billion, all records. Per-share earnings rose 14 percent, marking the 10th consecutive year of double-digit growth.

Yum’s international strength is one reason every top Wall Street restaurant analyst has a positive or neutral rating on the company’s stock, which rose 20 percent last year.

Focusing on emerging markets makes sense, says R.J. Hottovy, a restaurant industry analyst for Chicago-based investment firm Morningstar Inc.

“First and foremost, the demographics of these markets merge well with the quick-service restaurant business,” he says. “You’ve got a growing young population with increasing spending power and strong demand for foreign goods.”

China, with a population of 1.3 billion, “represents the retail opportunity of the 21st century,” Novak says. “And we have a dominant presence.”

Yum operates more than 3,700 KFC restaurants in China after adding 587 last year, and outnumbers McDonald’s nearly three to one. About 60 percent of those units are open 24 hours a day, and a high percentage of their general managers are college graduates.

The restaurants offer quick-service chicken, beef, seafood, and rice dishes, like the Dragon Twister, a wrap with fried chicken strips, cucumbers, scallions, and duck sauce. Breakfast features western items and local favorites like congee, a rice porridge.

Meanwhile, Pizza Hut is the largest Western casual-dining concept in China with more than 625 units selling pizza, pasta, rice-based dishes, and even escargot.

Yum also has Chinese quick-serve concept East Dawning, with about 30 units, and last year acquired Little Sheep, a 450-store leader in China’s $5 billion hot-pot cooking business.

Yum’s China stores are so successful that they have three-year cash-on-cash returns, meaning unit development costs are recouped from profits within three years.

Part of the company’s success is that it built a strong supply chain and training staff in China, allowing Yum to add new restaurants easily, Hottovy says.

The Chinese “just love” American products, from food to movies, says Frank Tian Xie, assistant marketing professor at the University of South Carolina at Aiken.

Some Chinese restaurant operations tried to compete head-to-head with KFC, he adds, “but they could not keep up with the quality control and cleanliness.”

If there are headwinds in China, they’re accelerating inflation and labor costs. Prices “are rising faster than the government says, and labor costs are up sharply,” Xie says.

Hoping to echo its China success, Yum made India a separate division this year. Novak says India, home to 1.2 billion people, “is on the same trajectory that China was on 10 years ago.” More than 100 stores opened there in 2011.

In addition to a leading presence throughout Southeast Asia, Yum also has 650 restaurants in South Africa and plans to add stores in seven more African nations this year. It also recently acquired 150 KFC units in Russia from a franchisee.

“In the emerging markets we have less than three restaurants per million people,” Novak says. “In the United States, it’s 60 per million.”

The growth potential positions Yum to “legitimately say that we can achieve our vision, which is to be the defining global company” in the restaurant space, he says.

While performance has been tremendous overseas, Yum brands have suffered in the U.S. Even with improvement in the fourth quarter, American same-store sales slid 1 percent in 2011, including 2 percent declines at KFC and Taco Bell. Pizza Hut was flat.

Yum plans to continue reducing its American store ownership by putting more units in the hands of franchisees, and last year the company sold its Long John Silver’s and A&W brands, which do little business outside the U.S.

Some analysts now consider the U.S. operations to be irrelevant to Yum’s growth potential. One company official reportedly told investors in early 2011 that KFC is not a big part of the company’s future profit growth in the U.S..

That didn’t help to smooth the choppy waters engulfing KFC and its franchise owners. In 2010, the KFC National Council and Advertising Cooperative, representing franchisees, sued Yum over marketing decisions, notably the focus on grilled chicken.

A Delaware judge last year issued a split ruling, agreeing that franchisees, who fund the advertising, have a right to be involved in the ad process, but KFC’s corporate officials are not obligated to adopt ads that may be harmful to the brand.

Since then, several franchise owners have filed for bankruptcy, partly because they could not meet the home office’s contractual demands to upgrade stores. One veteran franchisee—an officer in the ad cooperative—was reportedly sued by KFC two months after the court decision for not meeting remodeling obligations.

Of the half-dozen major KFC owners contacted to comment on Novak’s leadership, none replied. “They’re all terrified,” says Andrew Selden, a Minneapolis attorney and counsel for the Association of Kentucky Fried Chicken Franchisees. “[They] don’t want to get on the targeting radar.” Battles between KFC and franchisees aren’t new. Even Novak mentions in his book that when he became president of KFC, he inherited a system that had financial problems and was “full of animosity.”

He credits his decision to work closely with owners in developing successful products for helping make his career.

Both sides share blame for the infighting, says Kevin Burke, managing partner at Trinity Capital, a Los Angeles investment bank. Part of the problem lies in franchising agreements that are archaic in the modern restaurant world.

Franchisees today “no longer have the same degree of input because the industry’s matured, and the franchisor is much more capable than in the 1960s and ’70s,” he says. As the industry evolved, companies hired professionals for most disciplines.

At the same time, it’s difficult for franchises to meet remodeling demands if sales keep slipping and the economy is struggling to recover from a recession.

Some KFC franchise owners also have been around long enough that they personally knew the late Colonel Harland Sanders, who founded Kentucky Fried Chicken and whose stylized visage adorns store signs. The owners believe they carry on his vision.

One of the newest of KFC’s 3,000 franchisees, Tabbassum Mumtaz, president and CEO of Apex Restaurant Management, praises Novak’s leadership. He has taken Novak’s course twice.

“David … walks the talk,” says Mumtaz, who counts about 90 KFC stores among his nearly 200 units. “He challenges people, beginning with himself.”

In fact, the owner credits Novak’s class with saving his business in 2009 by sharpening his focus. “I get emotional,” he says, chocking up. “He changed my business, my life.”

While Yum has made missteps over the years, including multibranding restaurants, Novak dispels any notion the company isn’t intent on building KFC’s U.S. sales.

“I can tell you that we are 100 percent focused on making sure we grow the U.S. brands,” the CEO says. He’s looking to drive same-store sales via “additional layers,” such as new dayparts and products, “and we have lots of initiatives that are beginning to take hold.”

Pizza Hut’s same-store U.S. sales jumped 5 percent in the fourth quarter despite heavy competition. There’s now constancy and value with $10 large pizzas, pasta specials on Tuesday, and wing specials on Wednesday. New products are also building traffic.

The direction is positive, says James Schwartz, chief executive of the nation’s largest franchise, NPC International, which owns 1,200 Pizza Huts and cobranded units.

“Yum has done a great job of listening to the [Pizza Hut] franchisees and the needs of the franchisees,” he says. “They provide the insight, strategy, and ideas. We provide the voice of reality.”

Novak sees Pizza Hut growing from 6,000 to 8,000 U.S. units in the next decade, helped by smaller stores for less-populated communities. And Taco Bell, which he calls the “nation’s second most profitable chain,” can grow from 5,000 to 8,000 stores if sales grow.

Taco Bell sales suffered last year after a lawsuit—later withdrawn—over the amount of beef in its products. Now it has several new initiatives, including First Meal, a breakfast menu being tested at 800 restaurants. The units open at 8 a.m. instead of 10 a.m.

“We don’t expect it to be booming sales initially, but we think it will build a foundation that will allow us to ultimately have a really significant business,” Novak says.

Taco Bell’s late-night business grew by adding incremental hours, and Novak expects the same for morning. Earlier hours can be added as sales build, potentially becoming 24/7.

Other innovations include the Doritos Los Tacos, which feature Doritos taco shells, and higher-priced Cantina Bell menu items, including $5 burritos, tacos, and bowls inspired by Miami-based celebrity chef Lorena Garcia.

KFC remains “our biggest challenge,” Novak says. “The good news is we have a new leader in place who has a lot of confidence with the KFC franchisees.”

So far, the new KFC U.S. president, John Cywinski, has shown a willingness to reach out, say Selden and Burke. And a new marketing campaign, based on KFC’s fresh items, was greeted with optimism because it extols existing products.

While Yum will spread Novak’s teachings in 2012, he vows this will not be a one-year effort. “This is something we’re going to drive home year after year,” he says. “It institutionalizes our cultural values.”

Part of Yum’s culture is social responsibility, especially as a global company that feeds the world. Toward that end, the company selected the United Nations World Food Programme as its charity. That includes the proceeds from Novak’s book sales.

“We wanted to have a program that we could galvanize the whole world around,” he says.

Novak’s book and speaking appearances promoting it have some observers wondering if he’s on the cusp of retiring and hitting the speaking circuit. The Yum CEO says he’s just displaying his passion for the company and its opportunities.

“When you do something like this, you’re not coasting,” he says. “You’re driving at 100 miles an hour. I never worked harder in my life.”