David Novak on Taco Bell: “They have never forgotten what we did.”

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In September of 2000, Taco Bell faced an unexpected challenge that was not of its own making. Kraft Foods, which distributed Mexican food products to retail stores using Taco Bell’s popular brand, announced a massive recall after it was found that their taco shells were made using genetically modified corn that had not been approved by the FDA. This quickly became headline news and even though these products were not the same as those sold at Taco Bell restaurants, sales dropped by about 25% almost overnight. 

 At the time, David Novak was the CEO of Yum Brands, Taco Bell’s parent (and, as owner of KFC, Pizza Hut and others, the largest restaurant company in the world).  Novak’s company had done nothing wrong, but its franchisees were hurting.  By contract, Yum Brands wasn’t obligated to do anything for the franchisees, and there were some within Yum management team who suggested that this might be an opportunity to let some of them fail, then purchase their outlets.  Novak listened to his advisors but decided instead to lend a hand to the struggling franchisees, many of whom were small, “mom and pop” operators.  He charged his finance people with helping the hardest hit storeowners re-structure their debt and later, when Yum won its lawsuit against the company that distributed the modified corn to Kraft, the proceeds were sent to franchisees.

     When asked how he chose this surprising and compassionate response, his answer is simple.  “I’ve always tried to operate on the Golden Rule,” he says.  “It’s the simplest premise in life and in business.  I look at a franchisee.  They toiled their life to build a business, they built the brand in their community and they get a bad break.  In that situation, you can take advantage of the break or you can come to someone’s aid and be a true partner.  In a partnership, I try to put myself in the position of the other guy and if someone had come in and bought my franchise, simply because they had the cash flow and the resources to do it, I wouldn’t think that was right.”

     Novak demonstrated that compassion and toughness are not mutually exclusive.  “The franchisees were very frustrated and they were talking about being difficult with us.  I said, ‘Now wait a second, I want you to do unto me as I’ll do unto you.  I want us to be partners and work together on this.  We’re going to get through these problems but we all have to be on the same team.’”

     Trust in the Taco Bell brand was re-built.  Hurting franchisees recovered, and through new product development and aggressive marketing, restaurant sales soared over the next several years.  Meanwhile, Yum experienced a high return on Novak’s integrity in the form of intense loyalty from franchisees.  “They have never forgotten what we did.  One of the most emotional meetings I’ve ever had was one at Pebble Beach where we had 35 significant franchisees and at the end, almost like a ceremony, each one of them came up and thanked me, individually.  They just stood in line.  Then they gave me a little Superman statue with my face on it.”

     Novak’s humility is evident in his response to these demonstrations of gratitude. “I was just doing what the CEO should do,” he says, “But one of the things that happens is that you get more credit than you should when things go well and more blame than you should when they don’t.  It just happened that in this case, things worked out.”

 

Takeaways

Great leaders are often able to reduce complicated problems or messages into a succinct, clear form.   This applies in matters of integrity and codes of ethics as well.  At the United States Military Academy, the Cadet Honor Code is simple; “A cadet will not lie, cheat, steal, or tolerate those who do.”  If you think about it, most ethical dilemmas could be resolved by checking them against this simple code.  In the Taco Bell example, David Novak managed his company through a swirl of very public challenges. In weighing his options, including some aggressive strategic advice from his advisors, Novak relies one of the simplest codes possible, and following the “Golden Rule” turned a challenging decision into an obvious one.