Private Equity Prompts Another Grocery Merger, Aldi and Winn-Dixie
Aldi surprised the grocery world last month when it announced plans to buy Southeastern Grocers, the parent company of Winn-Dixie. Aldi, headquartered in Germany, has been the fastest growing grocer in the U.S. for three years running, but it primarily builds new stores instead of acquiring them. It’s unclear how Aldi will convert larger Winn-Dixie stores to its lean, low-stock model or if the discount chain will experiment with a more conventional format. Either way, with 400 new locations the deal would majorly expand Aldi’s presence in the U.S. southeast, particularly Florida where 75% of Southeastern Grocers’ stores are.
While the buyer is a little unusual, the story of how Winn-Dixie went up for sale is unfortunately all too familiar. Southeastern Grocers is the creation of a private equity firm, Lone Star Fund, which has been trying to cash out on its grocery investments for a decade. Private equity is notorious for loading grocery chains with debt, paying themselves millions in dividends, and then selling chains through a public offering or acquisition. It’s part of the reason Kroger is trying to buy private equity-owned Albertson’s. Not only does this trend further grocery consolidation, and the harms to workers, shoppers, and suppliers that come with it, but it enriches financiers at the expense of workers and store improvement.
Lone Star has been trying to sell its grocery chains in the southeast for years. Lone Star first bought the Georgia and Carolinas chain, BI-LO, in 2005, followed by Winn-Dixie in 2012 and Harveys in 2013. Lone Star formed Southeastern Grocers in 2013 to oversee the chains, and in 2016 it started converting some Winn-Dixie stores to a new Hispanic food concept, Fresco y Más. Lone Star used leveraged buyouts, or loans backed by store assets, to finance its acquisitions, which loaded the chains with debt and costly interest payments.
Lone Star proceeded to take out even more loans against Southeastern Grocers to pay itself handsome dividends. For instance, Lone Star took out a $475 million loan to give itself a $458 million dividend. Southeastern Grocers paid $205 million in interest on that loan between 2014 and 2018. Lone Star also sold $145 million worth of land out from under its distribution centers and grocery stores to raise quick cash and finance debts. All told, from 2011 to 2018 Lone Star extracted $980 million in dividends from Southeastern Grocers, to say nothing of what it made in management fees.
Southeastern Grocers amassed six times more debt than earnings. Paying these debt obligations and new rents crippled the grocery chains and drew resources away from investing in stores, raising workers’ wages, and lowering prices for customers. BI-LO declared bankruptcy in 2009 and then Southeastern Grocers went bankrupt in 2018; in both cases, Lone Star restructured the companies and held onto them. In the second bankruptcy, 94 grocery stores closed and over 2,000 workers lost their jobs.
Lone Star has been trying to sell off Southeastern Grocers since its bankruptcy. In 2020 Southeastern Grocers sold most of its BI-LO stores plus some Harveys stores back to the company it first bought them from 15 years prior, Ahold-Dehlaize. Now it wants to sell Winn-Dixie and the rest of its Harveys to Aldi for an undisclosed sum and spin-off Fresco y Más to an investment company, Fresco Retail Group.
With this deal, Lone Star can make a clean exit, offload the chains and their debts, and walk away having made hundreds of millions in dividends and fees. But the deal will consolidate local grocery markets and hurt workers and shoppers across the southeast.
On the one hand, a larger Aldi could increase competition with another leading grocer Publix, which maintains an impressive 43% state-wide market share in Florida. However, on a more local level, shoppers will lose options where Aldi and Winn-Dixie or Harveys directly compete. For instance, residents in Okeechobee, Florida rely on just four stores for groceries: an Aldi, Winn-Dixie, Publix, and Walmart. After this merger, they’ll have only three options.
Taking on hundreds of conventional stores will also be a major challenge for Aldi. Executives have said they plan to convert some Winn-Dixie’s to smaller, no-frills Aldi’s, and operate some stores as is. Aldi could struggle to manage stores with over twice as many products and twice as much space as it’s used to. “They’re a very capable operator that’s taking a huge risk. It’s also a risk to the consumer as to whether or not they can integrate and operate these stores,” says Errol Schweizer, a grocery industry analyst and former grocery vice president for Whole Foods. “Ten years from now, if half those stores are not doing well or closed, I wouldn’t be surprised.”
Both store closures and store conversions could cut jobs. A typical Aldi has around eight to 10 employees, whereas a Winn-Dixie can employ upwards of 70 people. Even if Aldi only converts half of Southeastern’s 400 stores, that will create a net loss of roughly 12,000 jobs. Aldi may also close Southeastern Grocers’ corporate headquarters in Jacksonville, Florida. The United Food and Commercial Workers union opposes this acquisition, though both Aldi and Southeastern Grocers are largely nonunionized.
What We’re Reading
In other grocery news, Kroger and Albertsons reached a deal to sell over 400 stores, eight distribution centers, and some brand assets to C&S Wholesale Grocers, if the Federal Trade Commission approves their merger. (Grocery Dive)
A judge denied New York City’s motion to dismiss a lawsuit from DoorDash, Uber, and Grubhub, aiming to overturn the city’s 15% food delivery fee cap. (Restaurant Dive)
Congresswoman Gluesenkamp Perez introduced a bill that would require agriculture equipment manufacturers to make all digital and physical tools available for more accessible repair. (Press Release)
The Public Justice Food Project spun out an independent legacy advocacy organization, FarmSTAND, which will focus on representing communities harmed by corporate agriculture. (Press Release)