When the boss starts tossing rubber chickens at you, is it time to start worrying? Not if the boss happens to be David Novak. Chicken-throwing helped Novak turn Yum! Brands into a true, globe-girdling giant of the restaurant industry.
Think about it: If a guy builds three world-class brands—KFC, Pizza Hut and Taco Bell—and then amasses more fast-food outlets than any one else on earth—about 36,000—wouldn't you want a personally autographed rubber chicken from him? That's just one of the ways Novak has rewarded his best troops during a remarkable 12-year reign.
It is with real chickens, of course, that he has made his true mark—and, increasingly, with chicken dinner for China. Operating from Louisville, Ky., headquarters that resemble a rambling, southern colonial-style mansion, Novak has managed to turn millions upon millions of Chinese into ardent, practically ferocious fans of Kentucky-style finger-lickin' good chicken.
In fact, KFC is now by far the largest fast-food chain in China—a ringing testament to the power of aspirational marketing.
"Not everybody in China can come to the United States; it's a very expensive thing to do," Novak says. "But you can experience what is a part of the U.S. The power of the brand is immense."
Pizza Hut has also been a big hit in the Middle Kingdom. The chain, which serves not just pizza but also appetizers, wings and pasta, is China's No. 1 casual-dining operation. In all, Yum! (ticker: YUM) garnered an estimated 45% of its $12.5 billion in revenue from China last year and 42% of its operating profit.
Novak was early to China, then pushed hard. The company is now the largest U.S. retail developer in that country, with more than 3,500 KFC stores, including 600 added last year, and another 560 Pizza Huts. It's essentially one big bet on demographics—and as Novak sees it, the odds are only getting better.
"When I first went to China in 1997, you would see the parents in line, and they would buy food for their kids. But they couldn't afford to necessarily buy anything for themselves," he recalls. That's no longer the case: "The consuming class is growing so rapidly. People say it's about 300 million people now, and in eight years, it will be 600 million."
Novak, 59 years old, is more than a strategist. He's also, as you may have guessed, a rather good humorist. Once the chicken gag wore thin, as it inevitably would, he switched to chattering teeth on legs; the idea was to recognize promising managers who walked the talk of leadership.
Behind the laughter are some very serious principles. "People leave when they don't feel appreciated," Novak says. "That's why we've made recognition a really high value. Our business is people-capability first; then you satisfy customers; then you make money."
As a result of that view, the walls and ceiling of his office are festooned with hundreds of photographs of Novak with cooks, restaurant managers and other employees around the world who have done meritorious work. Anyone applying for a management job at Yum! would do well to study those walls.
"If you can't go and put your arm around a cook and make that person feel good, don't come to work here," Novak will say.
NOVAK IS a THOROUGHLY self-taught practitioner of the managerial arts. "As silly as it may seem, for years when conversation turned to the subject of where people had earned their MBAs, I'd excuse myself and go to the bathroom so I wouldn't have to answer the questions," he writes in an instructive and engaging new book, Taking People With You, published earlier this month by Portfolio/Penguin.
Novak does appear to have learned a thing or two. In fact, based on one of the endorsements on the book's cover, he could be the dean of the business schools at Harvard, Wharton and Stanford combined. "David Novak," blurbs Warren Buffett, "is the best at leadership, whether teaching it in this book or practicing it."
In other words, Novak is a thoroughly worthy successor to "Colonel" Harland Sanders, known to most folks simply as Colonel Sanders, the southern gentleman who founded the company in 1952 and whose likeness still appears on KFC signs everywhere.
The original colonel—who won his title not from battle, but from the state of Kentucky as a business honor—ran the company as Kentucky Fried Chicken. Eventually, in 1964, he sold it to a group headed by future Kentucky governor John Y. Brown. After changing hands twice more, KFC, which then had 4,720 stores in the U.S. and another 1,855 in dozens of countries overseas, was acquired by PepsiCo (PEP) in 1986.
PERHAPS THE MOST remarkable part of all is how David Novak got his foot in the door and over time rose to the top, becoming chief executive of the resulting Yum! Brands and eventually carrying the mantle of the U.S. to China.
The son of a surveyor for the U.S. Coast and Geodetic Survey, he lived in 23 states before he finished seventh grade, moving from one trailer park to the next every three to four months. "We always looked at it like an adventure," he says, his southern accent tinged with inflections from Texas and the northern plains. "On every move, we tried to get up and get going early so we could always get the best possible spot in the next trailer park," he says.
The traveler eventually packed himself off to the University of Missouri. He collected a degree in journalism, went to work in advertising and eventually jumped to one of his clients, PepsiCo—or more precisely, PepsiCo's Pizza Hut chain.
As he left advertising behind, he breathed a great sigh of relief. To be beholden to clients wasn't his slice of pie. "I wanted to be accountable," he says. "I wanted to make the decisions."
He began to do just that, duking it out with such rivals as Godfather's Pizza, then run by erstwhile presidential candidate Herman Cain, Little Caesars and even McDonald's (MCD), which made a foray into pizza in 1989. Novak, ever the jester, snapped back at McDonald's with ads warning customers they'd be making a "McStake" if they ate "McFrozen" pizzas.
In his four years at Pizza Hut, Novak helped double sales and profits, earning a nice promotion for himself: He took over sales and marketing of Pepsi's flagship brand, Pepsi-Cola.
Worried about being pigeonholed a marketing guy, Novak paid a visit to PepsicCo's then-CEO, Wayne Calloway, and asked for an operations job. "I said, 'If I don't do a good job, you can fire me, put me back in marketing, do whatever you want to do, but give me a shot at this.' " In 1992, he was named chief operating officer of Pepsi-Cola North America. "PepsiCo was a company that had a reputation for taking risks on people and putting people in big jobs early in their career," he says.
The next stop: the presidency of KFC, and he took to it like a hungry man to a bucket of chicken. In fact, he says, he liked it so much that he said "no" when PepsiCo offered to put him charge of the Frito-Lay snack unit, which was then twice as large as KFC.
"I said no because I love the restaurant business," he explains. Fortuitously, he adds, his decision to stick with KFC left him in a great spot for Pepsi's 1997 spinoff of KFC, Pizza Hut and Taco Bell into a separate company called Tricon Global Restaurants. "I didn't know at the time that they were thinking about the spinoff," he says.
Nice break—for both Novak and investors. He took over as CEO of the new company in 2000 and the stock took off. Since the spinoff, Yum! shares have delivered a total return of more than 800%. The stock of his former parent, PepsiCo, is up 122% by comparison, and the Standard & Poor's 500 index is up 75%.
Novak, it must be said, still has a long way to go to catch up with one particular rival. Although he tops McDonald's in number of outlets, the guys with the Golden Arches do twice as much dollar volume. But if Novak has anything to do with it, that gap could start narrowing. He continues to search the world for growth opportunities, and he has plenty in his sights.
It starts with China, which is growing at a nearly 30% annual clip. Novak also is looking for serious sales in India—$1 billion in 2015, up from an estimated $230 million last year. He is also ramping up in Africa, Russia and Thailand. In all, Yum! has nearly 19,000 restaurants outside the U.S., including more than 10,000 in emerging markets.
The only real problem is at home, in the brutally competitive U.S. markets for fast food and casual dining. There are scads of rivals, and the punk economy of the past few years hasn't helped one bit. Taco Bell, which accounts for some 70% of operating profits here, clocked a 2% drop in same-store sales for the third quarter. KFC and Pizza Hut were each down 3%.
Novak and his team are making some smart moves in response. Yum! is selling more and more of its U.S. stores to franchisees, earning a lump sum up front and then steady royalties.
For instance, the portion of franchised KFC stores in the U.S. is climbing to 95% from 87%. Though stable, this kind of business isn't as profitable as running your own store in a high-return market, but Novak is simultaneously raising the portion of overseas outlets that the company owns rather than franchises. The upshot: Some 70% of all Yum!'s company-owned stores are likely to be in emerging markets by 2014, up from 53% now.
In addition to the ravages of the market, Taco Bell took a public-relations hit from a 2011 lawsuit by a California resident claiming its beef didn't meet industry standards because of too many additives, but the suit was eventually withdrawn. Novak seems confident 2012 will be a recovery year for Taco Bell, thanks in part to new offerings like tacos with nacho-cheese shells.
Pizza Hut, for its part, is facing stiff competition from delivery-only operators like Papa John's and Domino's, but Novak sees room to expand in smaller towns across the country.
KFC is redoubling efforts to ensure that customers get the quality and service they expect. And Novak is unloading Yum's Long John Silver's fish chain and A&W All-American Restaurants to plow more money into emerging markets.
Investors needn't fret that Novak will be gallivanting around China while the U.S. drifts. On his visits to China he stays just long enough to say the only three things he can say in Chinese: Hello. Thank you. Build more.