Fast-growing German discount grocer Aldi is buying the Winn-Dixie and Harveys Supermarket chains, adding roughly 400 stores to its U.S. portfolio as it jump-starts its business in the Southeast and adds to consolidation sweeping the industry.

Aldi, with its domestic headquarters in Batavia, Illinois, said Wednesday it agreed to buy Winn-Dixie and Harveys from their parent, Southeastern Grocers, which is based in Jacksonville, Florida. Terms of the deal, expected to close in the first half of next year, weren't disclosed.

Southeastern is actually divesting its entire portfolio, saying Wednesday it was also selling its Fresco y Más operations, including all its 28 stores and four pharmacies, to Fresco Retail Group. That transaction is slated to be completed in the first quarter next year.

Aldi and its discount-grocer rival, German Lidl, have both been opening U.S. stores at a breakneck pace.

“With their German home market reaching saturation, both companies have been placing greater emphasis on generating sales internationally and expanding their brick-and-mortar footprint,” Coresight said in a report last year titled “Head-to-Head in Discount Grocery Retail: Aldi vs.Lidl.

But the U.S. domestic supermarket sector is extremely competitive, with established regional powerhouses like Publix entrenched in the Southeast and online grocery sellers as well as national chains having a piece of the grocery market including Walmart, Target, Costco, Amazon Prime, Amazon Fresh and Whole Foods Market, which the e-commerce giant bought in 2017 for $13.7 billion.

That acquisition was just part of the consolidation the grocery industry is experiencing. Cincinnati-based Kroger, the nation’s largest supermarket chain, in October last year said it was acquiring Albertsons Cos., headquartered in Boise, Idaho, and the second biggest U.S. grocery chain, for $24.6 billion.

That transaction is still undergoing regulatory review. At a congressional hearing last year, the CEOs of both chains testified the merger was necessary for their companies to succeed in a brutally competitive and changed landscape for grocers.

The acquisition of Winn-Dixie and Harveys builds on Aldi's momentum and supports its "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 CEO Jason Hart said in a statement.

The deal includes about 400 Winn-Dixie and Harveys locations in Alabama, Florida, Georgia, Louisiana and Mississippi, encompassing 75% of the chains' grocery locations. Under the proposed deal, Aldi will acquire all outstanding Southeastern capital stock in an all-cash transaction, which includes all the company's grocery operations under the Winn-Dixie and Harveys banners.

"This merger agreement is a testament to our successful transformational journey and the tireless work of our dedicated associates who serve our communities," Anthony Hucker, Southeastern Grocers president and CEO, said in a statement. "Aldi shares our vision to provide exceptional quality, service and value — and this unique opportunity will evolve our business to benefit our customers, associates and neighbors throughout the Southeast."

Neil Saunders, managing director of GlobalData, weighed in on the sale in a note on Wednesday.

"The proposed acquisition of Southeastern Grocers by Aldi represents another example of consolidation in the U.S. grocery market, at a time when margins and sales are coming under increasing pressure," Saunders said. "The deal will come as a relief to the owner of Winn-Dixie and Harveys, which has been struggling to compete for many years. Under the stewardship of Aldi, the business will have access to much deeper pockets and a ruthlessly efficient and effective supply chain which will help reduce costs. This is important as shoppers at Winn-Dixie are relatively price sensitive and demand a strong value for money proposition ...As a low-price leader, Aldi will no doubt make the chain much more competitive."

Aldi and Southeastern didn't immediately respond to an email from CoStar News asking for a response to Saunders' comments.

Aldi will be evaluating which Winn-Dixie and Harveys stores it "will convert to the Aldi format to better support the neighborhoods we'll now have the privilege of serving," according to Hart.

"For those stores we do not convert, our intention is that these continue to operate as Winn-Dixie and Harveys Supermarket stores," he said.

Expanding by purchasing, rather than opening, stores is a new tack for Aldi, according to Saunders and others.

"The deal is also a relatively unusual step for Aldi, which normally grows organically by opening stores rather than acquiring businesses," Saunders said. "However, in some ways an acquisition makes sense as Aldi’s proposition has been well received in the U.S. and is currently aligned with the consumer focus on value for money. At a stroke, this takeover will give Aldi a significant number of extra stores and improve its geographical coverage."

Bill Read, an executive vice president at Retail Specialists, told CoStar News he wouldn't have expected such a deal.

“Aldi has done well penetrating many of the Southeastern markets and buying an established grocer that’s been around for what — 30,40, 50 years — rather surprising," Read said of the planned acquisition.

But Winn-Dixie has the kind of geographical advantages, in terms age of stores and market penetration, that could be attractive to an acquirer "because you buy scale fairly quickly," according to Read.

In its report, which predates news of the purchase of Winn-Dixie and Harveys, Coresight said that kind of strategy would make sense.

“Unlike other traditional retailers, Aldi and Lidl have relied chiefly on organic expansion, guided by their financial prudence and their status as privately owned companies,” Coresight said. “However, they should also evaluate acquisitions or joint venture agreements for new market entries — as they are less risky options than organic growth, and would enable Aldi and Lidl to take advantage of their partners’ facilities and their knowledge of the market environment.”

Aldi first established its presence in the Southeast in the mid-1990s and since has invested $2.5 billion in the region, according to the grocer.

Most recently, it deepened its ties to the region, opening its 26th regional headquarters and distribution center in Loxley, Alabama, to help support new stores, with plans to open 20 new Aldi locations in the area by the end of the year. Southeastern Grocers established its presence in the region nearly a century ago.

"There will, no doubt, be some disruption as systems and operations are changed," Saunders said of the acquisition. "However, Aldi’s deep experience in grocery will help mitigate this. What will be more interesting is how Aldi changes the Winn-Dixie and Harveys stores it is not intending to re-badge. This will require a bit of a shift in Aldi’s traditional operating model and suggests that the firm wants to experiment with some new ways of reaching and appealing to U.S. shoppers.

The downside of Aldi’s standard model is that it is fairly one dimensional and is not always appealing to consumers who, for example, want more choice from the grocery assortment."

Southeastern has had a storied history and most recently has been selling off stores, to buyers including Food Lion, in the past few years. Those sales were after Southeastern emerged from Chapter 11 bankruptcy protection in 2018.

The company also scrapped plans to go public in 2021, which would have raised $142.4 million for the business. Southeastern was looking into a sale last year, according to The Wall Street Journal.

Deutsche Bank served as financial adviser to Aldi, Baker & McKenzie was its transaction counsel and Kayne Law Group served as its real estate counsel. Southeastern Grocers had RBC Capital Markets as its financial adviser, Willkie Farr & Gallagher as transaction counsel and Kirkland & Ellis as antitrust counsel.