The ALDI Acquisition of Winn-Dixie & Harveys Supermarket Reshaping the Grocery Landscape

The grocery industry is constantly changing as various grocers compete for  dominance, and staying innovative is crucial for survival. A notable development that has grabbed the attention of the industry is ALDI’s announcement has revealed its intentions to purchase the Winn-Dixie and Harveys Supermarket chains from Southeastern Grocers. This acquisition encompasses approximately 400 grocery stores spread across five Southeastern states, signaling a bold move in ALDI’s ambitious expansion strategy. However, the process of integrating these conventional supermarkets into ALDI’s operations presents a distinct set of challenges.

One of the intriguing facets of this acquisition revolves around ALDI’s approach to assimilating two traditional grocery chains into its established operations. ALDI has traditionally followed a distinct store format that differs from the larger-scale model employed by Winn-Dixie and Harveys. This prompts the question of whether ALDI will opt to rebrand the recently acquired stores with its own name or preserve the existing banners. This strategic choice will yield substantial influence over how ALDI enters new markets and positions itself in the face of competition.

The ALDI Acquisition

On August 16, 2023, ALDI announced that it had entered into a definitive deal to acquire Winn-Dixie and Harveys Supermarket. The acquisition expands ALDI’s ability to serve the Southeastern region with high-quality products at the lowest feasible costs.

According to Jason Hart, ALDI’s CEO, Winn-Dixie and Harveys Supermarket boast extensive legacies and a strong customer base in the Southeast. Jason expressed anticipation for the future as the company aims to continue serving loyal customers. He also emphasized that the decision to pursue this acquisition aligns with their overarching growth strategy, which includes the expansion in the Southeast and a nationwide plan to introduce 120 new stores throughout the year. This initiative aims to achieve a total store count surpassing 2,400 by the end of the year, reflecting ALDI’s commitment to delivering savings on grocery bills while maintaining a steady growth trajectory.

ALIDI’s acquisition announcement underscores its relentless pursuit of expansion as the discount grocer extends its reach into prime locations across the Southeastern U.S. This transaction is expected to be finalized in the first half of 2024 and signifies ALDI’s largest acquisition so far in the U.S.

Comparing Market Performance

It is no secret that ALDI is a much larger and established brand than Winn-Dixie and Harveys Supermarket. This fact alone can bring peace to investors of the two smaller chains, knowing that a financially stronger owner is acquiring them.

ALDI is set to manage 2,400 stores by the end of 2023, including the opening of 120 new stores by year-end. According to Forbes, with the recent acquisition of approximately 400 additional units, the company is poised to operate around 2,800 stores in the coming year.

According to a survey conducted by Progressive Grocer, ALDI currently holds the 24th position in terms of revenue, reporting $18.2 billion in fiscal 2022. In contrast, the combined revenues of WinnDixie and Harveys, following their merger, rank 39th with a total of $9.6 billion in fiscal 2022.

With a store location in 39 states, ALDI is also set to become the country’s third-largest grocer by the end of 2023.

It is important to note that Winn-Dixie and Harveys Supermarkets only have locations in the Southeastern region of the U.S. Florida has the most Winn-Dixie locations, and Georgia has the largest number of Harvey Supermarkets. According to ScrapeHero, there are 545 Winn-Dixie stores in the U.S. and 25 Harveys Supermarkets.

The Merger’s Effect on Capital Markets

Lenders avoided Winn-Dixie-anchored properties prior to the merger or priced debt as much as 50 to 100 basis points higher than they would for debt against an ALDI-anchored shopping center. While the merger isn’t due to be completed until early 2024, lenders are comfortable making loans on Winn-Dixie properties today and are pricing them like they would an ALDI property.

One regional bank executive in the Southeastern U.S. said, “The ALDI acquisition of Winn-Dixie completely changes the landscape on how we would have looked at a Winn-Dixie deal in the past. ALDI has a high credit rating, which puts it in the A tier category vs. probably the C or D category from a credit tenant standpoint. Compared to Winn-Dixie deals, you will see a higher LTV, longer terms, preferred rates, and a much higher level of interest to do the deal with ALDI. We just closed on a Winn-Dixie/ALDI deal, and the merger announcement is what got us comfortable with doing the deal. It’s a game changer.”

The Merger’s Effect on Real Estate Prices

Winn-Dixie properties are trading at a minimum of a 6.5% cap rate, while ALDI properties are trading as low as a 4.5% cap rate. All things being equal, when comparing two similar properties (age, location, size), the ALDI property could be valued as much as 35% higher than the similar Winn-Dixie property. Markets, however, are discounting mechanisms. It’s plausible that as the completion of the merger approaches, Winn-Dixie properties could trade at a higher price while ALDI properties’ prices stall or decline slightly.

Investment Considerations

Industry experts believe that Winn-Dixie property owners can be more aggressive in their near-term pricing strategy and that investment sales agents, who can explain how and why the capitalization rate differential is narrowing, are best suited to represent those owners. There are risks to property owners with shorter-term leases as ALDI does plan to close some Winn-Dixie stores, but a well-maintained Winn-Dixie property in a good location, with longer-term leases, should command a premium price in the next 6 months.

ALDI properties may stall as the parent company absorbs the new Winn-Dixie stores, debts, etc., of the merger. Owners of both Winn-Dixie and ALDI properties might consider the “Winn-Dixie pop” and “ALDI stall” when they recalibrate their investment strategy.

ALDI’s acquisition of the Winn-Dixie and Harveys Supermarket chains represents a pivotal moment in the grocery retail industry. This move not only strengthens ALDI’s presence in the Southeastern region but also underscores its commitment to delivering affordability and quality to a wider customer base. The acquisition has already profoundly impacted capital markets, with lenders showing greater confidence in Winn-Dixie properties due to ALDI’s involvement.

Real estate prices are also experiencing shifts, with ALDI properties commanding higher valuations. Investors should consider the evolving landscape carefully, as Winn-Dixie and ALDI properties may have unique opportunities and challenges in the coming months. Overall, this acquisition is reshaping the grocery industry and will continue to be a focal point of interest as it unfolds in the lead-up to its expected completion in early 2024.