After SEG Deal, Aldi Poised To Operate 2,800 Stores Nationally

So, Southeastern Grocers Inc. (SEG) finally found a buyer after years of searching by its private equity owners to escape from a challenging investment originally made in 2005, an even longer period of time than Cerberus’ control of Albertsons.

Currently, Southeastern Grocers is controlled by four private equity firms – Fidelity Investments, Osterweis Capital Management, Millstreet Capital Management LLC and Lone Star Funds, which has been connected to the Winn-Dixie name since 2007 (Lone Star acquired Bi-Lo stores in 2005 and two years later acquired Winn-Dixie to created SEG).
And of all buyers, who’d a thunk Aldi would emerge as the winning bidder? With about 400 stores about to become part of the German retailer’s portfolio, the most intriguing questions are – how many stores does Aldi convert to its discount format, how many does it continue to operate as conventional Winn Dixie or Harveys supermarkets, how many stores ultimately become hybrid models featuring more branded products and more variety, and how many stores does Aldi ultimately sell?

But first, let’s review the fundamentals of the deal.

Under the proposed merger agreement, which is scheduled to be completed in the first half of 2024, Aldi will acquire all outstanding SEG capital stock in an all-cash transaction, which encompasses all SEG grocery operations under the Winn-Dixie and Harveys Supermarket banners. This includes approximately 400 stores in Alabama, Georgia, Louisiana, Mississippi and Florida where 75 percent of SEG’s stores are located. When completed, Aldi will be the second largest grocery retailer (measured by store count) in the U.S. with about 2,800 stores, which places it behind Walmart’s more than 5,000 U.S. retail units.

Following the completion of the sales process, Aldi will serve the customers and communities of Winn-Dixie and Harveys Supermarkets through the continued operation of the banners’ existing stores. The retailer will also evaluate which locations will be converted to the Aldi format. For those stores that are not converted, Aldi intends for them to continue to operate under the Winn-Dixie and Harveys Supermarket banners and those stores will represent the German discounter’s first conventional supermarket operation since it initially entered the U.S. in 1976.

Concurrently, SEG has agreed to divest its Fresco y Más operations. SEG anticipates that the sale of the Fresco y Más banner will be consummated in the first quarter of 2024. The Fresco y Más banner, including all 28 stores and four pharmacies, will be sold to Fresco Retail Group, LLC, an investment group strategically focused on food and grocery. Fresco Retail Group, LLC plans for all stores and pharmacies in the Fresco y Más banner to continue operating as they are presently. We’re told that investment group is controlled by an existing Florida-based Hispanic retailer that is looking to expand its operation by agreeing to acquire Fresco y Mas.

Anthony Hucker, president and CEO of SEG since 2017 who deserves credit for stabilizing the once-troubled merchant, said, “Our successful transformational journey has created a unique opportunity with leading partners who share our vision and common commitments to creating value for their customers. We believe these next steps will fuel a phenomenal experience for our customers, new opportunities for our associates, and increased value for our shareholders. As the sales processes proceed, we’ll stay acutely focused upon delivering the exceptional quality, service and value that our customers and communities have come to expect from us.”

“Like Aldi, Winn-Dixie and Harveys Supermarket have long histories and many loyal customers in the Southeast, and we look forward to serving them in the years to come,” Aldi U.S. CEO Jason Hart said. “The time was right to build on our growth momentum and help residents in the Southeast save on their grocery bills. The transaction supports our long-term growth strategy across the United States, including plans to add 120 new stores nationwide this year to reach a total of more than 2,400 stores by year-end.

“Aldi will operate Winn-Dixie and Harveys Supermarket stores with the same level of care and focus on quality and service, as we also evaluate which locations will convert to the Aldi format to better support the neighborhoods we’ll now have the privilege of serving,” Hart commented. “For those stores we do not convert, our intention is that these continue to operate as Winn-Dixie and Harveys Supermarket stores.”

Several days after the deal was announced, Hart told CNBC that the SEG acquisition would bring his company “speed to market” while adding that “our intention is that a meaningful amount of stores will continue to operate as Winn-Dixie and (Harvey) Supermarkets.” Was Hart implying that an unknown number of those traditional supermarkets might be sold?

When asked what Aldi offers that’s different when competing against industry giants such as Walmart, Kroger and Dollar General, Hart said: “We carry a limited number of SKUs first and foremost – a couple of thousand SKUs in our stores versus our competition that may have many times that that drives higher volume per SKU, driving scale that provides efficiency both in our business and for our suppliers. The dozens of brands and sizes and small variants of the same product – the result of that [in rival stores] is tens of thousands of products that isn’t necessarily the result of customer demand. It’s more so the brand’s demand for shelf space within those stores. And the result actually can frustrate customers by overcomplicating the shopping experience. At Aldi, we simplify that shopping experience for the customer, offering great quality and great prices.”

Aldi’s approach to acquiring SEG somewhat resembles Lidl’s strategy in acquiring Long Island-based Best Markets in 2018. It was the first time that Lidl had made an acquisition to gain sales and market share since it entered the U.S. in 2017. However, that deal allowed the rival German limited assortment merchant to enter a brand new market. Aldi already operates 210 stores in the Sunshine State.

The decision to acquire Winn-Dixie and Harveys is a strong indicator that Aldi intends to prioritize growth in the Southeast, particularly Florida, which remains the fastest growing (by population) state in the country. Earlier this year, The Batavia, IL-based limited assortment merchant opened a new 564,000 square foot distribution center in Loxley, AL.

Lone Star Funds (the original majority equity owner) has been trying to unload SEG since it emerged from Chapter 11 bankruptcy in 2018. In late 2020, SEG announced it was planning an initial public offering that would have taken the retailer public. That plan fell apart within several months.

In two separate transactions in June and September 2020, SEG sold 85 Bi-Lo and Harveys stores and a distribution center to Ahold Delhaize USA, which effectively ended Bi-Lo’s run as a grocery entity. Harveys’ 25 stores in Georgia and Florida remain operational. Ironically, Ahold USA owned the Bi-Lo stores until it sold them to Lone Star in 2005. Today, those stores operate as Food Lion units.

In the nearly two weeks since the deal was announced, a number of have people predicted that this deal would have a negative impact on Publix and Walmart, the two market leaders in Florida. I couldn’t disagree more. Just do the math – even a low-volume Winn-Dixie store averages $300K per week. That’s about double the average weekly sales at a typical Aldi. By offering a full assortment of products, that “missing” volume will most likely end up at Publix and Walmart, increasing their current volume.

Additionally, we’ve heard that this deal will be devastating to C&S Wholesale Grocers, SEG’s primary grocery supplier. I’m not sure devastating is the proper word. Sure, C&S won’t be serving the stores that are converted to the pure Aldi model. However, those conversions might not be completed for several years while the stores continue to operate as they did prior to the announcement of this deal. As for the stores that remain permanently bannered as Winn-Dixie and Harveys (or end up as a hybrid model), C&S is likely to maintain that business whether they are operated by Aldi or sold to other independent retailers.

‘Round The Trade

Coming off a record-setting Prime Day event last month, Amazon has scheduled a second Prime Day promotion this October….Save A Lot (SAL), the St. Ann, MO-based discount retailer which has struggled for the past half-decade, has completed a deal to sell its hometown market stores, which was the only area where SAL still operated corporately-owned units. The buyer for those 18 stores is current SAL licensee Leevers Supermarkets, which owns 29 SAL units in the Denver and Delaware Valley markets. We’ve already heard reports that Leevers might be looking to unload its 17 stores around Philly which it acquired in 2021.

Local Notes

Wawa is testing an all-digital store on the campus of Drexel University (located on the 3100 block of Chestnut Street). While the highly successful c-store chain said the catalyst behind the test unit is to offer the greatest level of convenience to its customers, methinks retail shrink via theft might have also been a strong consideration in its planning.

Two retailers that are going in different directions in their respective Q2 operating periods are Target and Walmart. Target’s overall sales dipped 4.9 percent and comp store revenue dropped even further – 5.4 percent. Digital sales also decreased 10.5 percent. However, the Minneapolis-based mass merchant did see an earnings turnaround with $835 million this year compared to $135 million in the corresponding period in 2022, when the company was plagued by excess inventory and the negative impact of subsequent markdowns. At Walmart, the numbers were stellar, even in this tough operating environment. Total sales increased 5.7 percent, comp store revenue at its U.S. stores rose 6.2 percent and the “Behemoth’s” digital sales increased 24 percent. Profits, too, were very healthy with earnings jumping 53 percent to $7.89 billion. One more fact of note: private label sales at Walmart increased 9 percent year-over-year and now account for 20 percent of all U.S. sales.

More Walmart news: Chris Nicholas has been promoted to CEO of Sam’s Club replacing Kathryn McLay who now becomes president and CEO of the company’s international operations. Those moves were made after Walmart International chief executive Judith McKenna announced her upcoming departure. Kieran Shanahan now becomes executive VP and COO of Walmart’s U.S. business, a position formerly held by Nicholas. Got that – there’ll be a quiz shortly. Locally, Walmart has completed a major remodeling of its Secaucus, NJ SuperCenter. The improvements include a reconfigured store layout, an upgraded pharmacy, a new front-end layout with additional Walmart+ lanes and more self-checkout registers, and new products and categories including a fresh pet food area and new cosmetics brands. The Secaucus store refurbishment is part of a two-year $75 million cap-ex investment for 11 of the Behemoth’s 61 Garden State units.

The U.S Department of Labor (DOL) has reached a settlement with Dollar Tree/Family Dollar over the Chesapeake, VA-based discounter’s unsafe operating conditions. The new agreement covers about 10,000 of the dollar merchants’ 16,000 locations nationally. If only the DOL could reach a similar agreement with Dollar General (DG), the industry leader, dollar stores, in general, would be safer places to shop. But then again, DG seems perfectly content to continue to operate many unsafe stores while accruing millions of dollars in fines.