David Novak's Strategy is Simple: To Make Yum! Brands the Best Restaurant Company in the World.

Locals call it the White House, a Tara-esque mansion with graceful white columns in an otherwise industrial part of Louisville. Built in 1970 by then president of KFC John Y. Brown Jr. (who later served as governor of Kentucky), the structure is now headquarters to YUM! BRANDS INC. (YUM), the world’s largest restaurant company. It also houses the Colonel Sanders Museum, a charming homage to the life of Harland Sanders, a once hardscrabble youth who went on to establish a restaurant empire called Kentucky Fried Chicken. Visit the museum at midday, and you’re met with the unmistakable aroma of fried chicken wafting from the basement dining center. KFC is on the menu every day, as are dishes from each of Yum!’s four other brands: Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American Food.

Yum!’s five brands represent a powerhouse in the quick-service restaurant (QSR) industry,which the National Restaurant Association values at $150 billion a year in the U.S. alone. Its outlets,which as of third-quarter 2007 amounted to about 35,000 in 112 countries, says David Novak, Yum!’s chairman, president and CEO, include globally leading brands in the chicken, pizza, Mexican style food and quick-service seafood categories. For 2007, the company estimated, some 1,275 new units opened in its China and Yum! Restaurants International (YRI) divisions alone.

Yum! Brands’ whimsical name reflects the notion that food, fun and satisfaction go together, says Novak. A peek inside his office proves that point — and emphasizes Yum!’s culture of employee and franchise-owner recognition. The mantel displays a wind-up toy shaped like a set of dentures on legs — this is the Yum! Award, which Novak gives to employees and franchisees who “walk the talk” of leadership and embody the corporate principles of customer focus, integrity and ingenuity. The walls are covered, floor to ceiling, with photos of Novak standing among employees and franchisees. His favorite image is a 2004 shot of 1,000 KFC restaurant general managers doing the Yum! cheer at the Great Wall of China to celebrate the opening of the 1,000th KFC on the mainland (see page 8). “The beginning of the Yum! Dynasty,” he says happily, settling into a leather club chair.

ACCIDENTAL CEO

The populist playfulness belies Novak’s toughness. Colleagues and friends often point to Novak’s ability to inspire teamwork and loyalty, but also note his competitiveness. Whether in golf, poker or the QSR industry, the 55-year-old CEO admits that he “can’t stand losing.”

As Novak, the son of a government surveyor, explains in his recently published book, The Education of an Accidental CEO: Lessons Learned From the Trailer Park to the Corner Office, he lived in 32 trailer parks in 23 states before the seventh grade. Although his life was nomadic, Novak says, he had a wonderful upbringing and built on his experiences growing up to create a stable and successful adult life. He has been with the same organization — albeit in different positions and divisions and under changed ownership — for 21 years. After joining PEPSICO INC. (PEP) in 1986, Novak rose to the ranks of chief operating officer at Pepsi-Cola North America, then president of both KFC and Pizza Hut.

In 1997, when PepsiCo spun off its QSR brands, the company chose Novak to lead the newly named Tricon Global Restaurants Inc. along with Andrall “Andy” Pearson, a former PepsiCo president and a professor at Harvard Business School. Novak served as Tricon’s vice chairman and president until 2000, when he became chairman and CEO. (Pearson remained an active board member until his death in 2006.) In An Accidental CEO,Novak explains that even as a student, he was driven. In addition to being on the debate team and editor of his high school newspaper, he sold encyclopedias door-to-door and worked as a hotel night clerk.

Why the word accidental in the book’s title? Novak never aspired to run a global business, he admits — his early dream was to be a creative director. After receiving a journalism degree from the University of Missouri, he became an advertising copywriter, eventually handling Pepsi’s client relations at Tracy- Locke/BBDO, now part of OMNICOM GROUP INC. (OMC), before moving to the client side.

“What I didn’t learn formally in school I learned from studying the leaders I most admired — and, in many cases, from spending time with them in person,” Novak says. The book relates how he took Warren Buffett to lunch at a KFC to ask his advice about navigating Wall Street; for leadership tips, Novak shadowed UCLA’s legendary basketball coach John Wooden. The CEO indicates that he is donating all of his proceeds from the book,which he co-wrote with author John Boswell, to the United Nations World Food Programme, which fights global hunger. Novak, often described as the quintessential Type A personality, says he equates winning with being No. 1. His game plan has been to transform Yum!’s restaurants from domestic brands to international icons and create an organization compelling enough to attract franchise owners.

GLOBAL GROWTH

For the past several years, Novak explains, one of Yum!’s key objectives has been to set up beachheads in global markets where its toughest rivals are far behind. “We are the single largest international retail developer in the world,” he says. “We are a tremendous global growth machine.”

Today, Novak says, Yum! focuses on four primary business strategies: building dominant restaurant brands in China; driving profitable international expansion; improving U.S. brand positions and returns; and driving high return on invested capital and strong shareholder payout. Graham Allan, president of Yum! Restaurants International, calls the division “an extraordinary growth story.” The combination of “powerhouse brands, global scale, a large, diverse and experienced organization and a
track record of consistent growth make YRI a truly exceptional restaurant company,” he adds.

YRI’s growth has been a large part of Yum!’s success, says Allan, pointing to more than 12,000 of the company’s QSRs outside the U.S. and China division (mainland China, Thailand and KFC Taiwan). YRI reports operating profit has more than doubled from $186 million in 1998 to $407 million in 2006. For 2007, Yum! indicates, it expected YRI to more than meet its full-year target of 10 percent operating profit growth, likely exceeding 15 percent.

To open an expected 850 restaurants in 2007, YRI’s eighth consecutive year of 700-plus new openings outside the U.S. and China divisions, the company says, it focused on three broad global arenas: franchise-only markets; established company-operations markets, such as the U.K., Australia and Mexico; and emerging markets with huge populations, such as India.

Novak notes that some 750 franchisees own and operate 85 percent of Yum!’s international business. Together they generate nearly $500 million in annual franchise fees and open up 90 percent of all new restaurants. The CEO calls the international presence both a cash cow and a growth engine that
requires little capital from headquarters.

Yum! says it expects a big chunk of its future growth will come from Continental Europe. The company reports that Pizza Hut is dominant in the U.K., and KFC France’s business enjoys the highest unit volumes of any FC business in the world.

However, Allan is clearly excited about the rapid development in emerging markets. He points out that Yum! is the largest and fastestgrowing QSR company in India, where Pizza Hut has been ranked the No. 1 most trusted QSR brand by a consumer survey for three consecutive years. After partnering with Rostik’s, Russia’s o. 1 fast-food chicken chain, Yum! reports it is now converting 100 Rostik’s units to Rostik’s/KFC co-branded restaurants.

The company says it plans to expand its third global brand: Taco Bell International. Mexico’s first Taco Bell opened in September 2007, and others are scheduled to debut in the Middle East, India, Spain and Japan.

Allan notes that YRI’s goal is to get to 15,000 restaurants in the next few years. “We have global powerhouse brands in each of our categories, with an enviable position in almost all countries in which we compete,” he adds. “We have a clear strategy for growth well into the future.”

The most exciting international growth may be coming from the Yum! China division,Novak reveals, where reported operating profit has grown from about $20 million in 1998 to $290 million in 2006. Yum! expected the divisionto exceed its full-year target of 20 percent operating profit growth in 2007. Yum!’s mainland China business, with more than 2,300 restaurants, generated a reported 26 percent growth of system sales for 2007’s third quarter, and as Novak puts it, “we’re only in the firstinning of a nine-inning game.” The CEO says he sees the potential for more than 20,000 KFCs, Pizza Hut Casual Dining and Pizza Hut Home Service units in mainland China.

Adds Sam Su, president of Yum! Restaurants China: “Our strategy is to be the leader in every food-service category in China.” Noting that the division expected to exceed its 20 percent operating profit growth target in 2007, Su adds that KFC is by far the largest and fastest-growing QSR chain on the mainland. Nearly one KFC opens every day, a growth rate of about three times its nearest competitor, the company reports.

Furthermore, Pizza Hut is China’s No. 1 casual-dining chain, according to Su. An additional 40-plus Pizza Hut Home Service delivery units serve “a rapidly emerging market” of consumers who are becoming more affluent and want to enjoy food at home without cooking it, he explains.

Management overseas is fairly decentralized, explains Novak, who says: “You can’t run China from Kentucky. Self-sufficient teams with local knowledge and expertise make things happen.” Beyond strong and seasoned local leaders, Yum!’s localization strategy involves its own distribution system, he explains. The restaurants serve familiar favorites like KFC’s Original Recipe but also create products that appeal to local tastes such as KFC’s Spicy Dragon Twister and Pizza Hut’s Seafood Catch Pizza.

Chinese operations, says Su, even devised a new brand in 2004: East Dawning. Now with eight locations in Shanghai, the restaurants feature Chinese decor and dishes such as sweet-and-sour pork rice and shaved ice topped with corn, red beans and peanuts. “We’re applying the best practices we have learned from building KFC and Pizza Hut into category leaders in China,” Su says. “We have great operational experience and a local management team that is all Chinese.”

BRAND -BUILDING AND INNOVATION

From Shanghai to the U.S., Novak is confident that Yum! has put in place the elementsto drive sustainable sales and profit growth. While the company’s mainland China and YRI businesses have led the way, Novak says that the U.S. business is improving; he points to positive same-store sales and operating profit growth for the company’s third quarter of 2007.

Calling Yum!’s U.S. business “well established,” Novak says that the division’s biggest asset besides category-leading brands is its 20,000 sites throughout the country. To reach the domestic business’ stated goal of increasing the current average annual operating profit growth from between 1 and 2 percent to 5 percent, Yum! says, it is building sales layers, introducing more exciting products and reducing company ownership of restaurants in favor of great franchisees.

“Each of our brands has tremendous heritage and great strengths, and we’re making them even more powerful by building greater relevance, energy and differentiation for our customers,” notes Emil Brolick, president of U.S. brand-building at Yum! Brands Inc., whoworks with the U.S. brand presidents. Brolick most recently served as president and chief concept officer for Taco Bell, which he led to what the company says is the second most profitable QSR concept in the U.S. As Brolick explains, Yum! is accelerating its focus on innovation by sharing best practices and implementing a process called the Yum! Insights Marketing Model across the brands. He suggests Yum!’s one-system mindset will guide future progress for the company’s U.S. business. Moreover, he adds, the company is updating its assets to make sure that customers see excellent representations of its KFC, Pizza Hut and Taco Bell brands.

CORPORATE CULTURE

With the balance sheet strong and international on a juggernaut, where is Novak focusing now? Partly, he says, it’s on corporate brand-building and educating shareholders about the strength and consistency that Yum! delivers. The company expects 2007 full-year earnings-per-share growth of 13 percent, marking its sixth consecutive year of at least 13 percent EPS growth.

“Ninety percent of people know KFC and Taco Bell, but they don’t know Yum!” Novak says. That picture is changing, however, insists Rick Carucci, CFO at Yum! Brands Inc. “Our competitive position continues to improve and our landscape for global growth is huge,” he explains, pointing out that Yum! was named America’s No. 1 shareholder-friendly company in the restaurant industry, according to Institutional Investor magazine’s 2007 corporate rankings. Notes Carucci: “We are making consistent financial performance, strong global growth and impressive cash generation key trademarks for Yum!”

Still, the most compelling driver of success may be Yum!’s focus on its 1 million employees and franchise associates worldwide, insists Novak. “It’s not possible to be a customer-driven organization without making your employees happy, challenged and engaged,” he maintains, “and then recognizing their achievements. It’s the act of recognition that inspires performance and encourages innovation.” Passionate about developing leaders at all levels in the organization, Novak created and personally heads “Taking People With You,” an intensive three-day Yum! leadership program for executives and franchisees around the world.

Yum! bundled its corporate values into a common framework called the How We Work Together principles. Those tenets include customer mania, belief in all people, recognition, coaching and support, accountability, executional excellence, positive energy and teamwork. Especially crucial, Novak says, is the customer mania principle. The company reports that it is continually training its employees and franchise associatesin the key elements that drive great customer satisfaction. Customer mania, the CEO maintains, is “the key to creating a people-oriented, performancedriven, customer-first organization.”