The grocery store sector is recession-resistant. But many consumers aren’t brand loyal and will look for cheaper options wherever they can find them. This is what’s driving Aldi‘s strategy with its Winn-Dixie and Harveys Supermarket acquisition last month. Its ultimate goal: eat into the market share of Publix, the dominant chain in the Southeast. What do analysts think of the strategy?

Aldi is known for its low prices and Winn-Dixie and Harveys (which each came in the deal) are heavily concentrated in the Southeast, which should play well into Aldi’s growth strategy. States like Florida are business-friendly and have a growing population.

Aldi is adding about 400 news stores mostly across Alabama, Georgia, Louisiana, Mississippi and Florida with the deal. Publix has more than 800 stores in Florida alone. This represents just of a small fraction of the industry size and there is plenty of more room for growth. According to IBISWorld, there are over 63,000 grocery stores and supermarkets in the U.S. Over 5,000 of them are in Florida, which has the third most in U.S. behind New York and California.

“The Southeast is a fast-growing, diverse market where competition is not as intense as other areas in the country, for example, the Northeast,” says Alvarez & Marsal Director John Clear. “Florida is the third most populous state in the U.S. and is dominated by Publix.”

Clear says consumers in the Southeast tend to be more price / value conscious than other areas which plays to Aldi’s strengths. Aldi tends to open more stores in lower income areas, another good fit with its latest acquisition.

Despite inflation showing signs of slowing and unemployment being near record lows, changes in consumer behavior that began during the pandemic are here for the long-haul, analysts say. Consumers are buying more store and private label brands because they are cheaper and have better value as opposed to name brands, according to a recent report from Stout, which expects this to continue for the foreseeable future. As a result, grocery store chains are investing more in store brand products.

Clear says the current inflationary environment is a “huge” tailwind for Aldi. “Their value proposition of low prices and high quality is perfect for a trade-down customer,” he adds.

The trade-down effect could be beneficial for Aldi, but not so much for Publix. “The danger here for Publix is the attraction for trade-down customers – i.e., those customers who are interested in spending less money on similar items,” Clear says. “With the current economic climate, consumers are more budget conscious and thus more likely to shop around for deals / low prices. Publix is a huge company with millions of customers – even a small percentage of those customers choosing Aldi on a regular basis would have huge ramifications for both sides.”