(UPDATED COVERAGE, Oct. 23) W. Newell & Co., the fresh produce wholesale distribution company launched by Supervalu in 2005, is being realigned with one of the company’s regions, eliminating the role of W. Newell’s chief operating officer Gary Gionnette and possibly scrapping its standalone model.

Whether W. Newell will continue to operate as a subsidiary of Supervalu, keep its own sales and service staff and maintain its autonomy has not been determined.

“We’re still looking at organizational structures,” said Rebekah Fawcett, supply chain communications manager for Eden Prairie, Minn.-based Supervalu. “Are we going to scrap this model or are we going to build this model? It’s too early to say.”

By the end of the company’s fiscal year, in February, W. Newell should be completely aligned with Supervalu’s Midwest-Southeast region, which handles distribution centers from Wisconsin and Illinois down to Alabama, Georgia, Mississippi and Florida, similar to W. Newell’s primary distribution range.

“We just decided it made more sense to realign with our wholesale region,” Fawcett said.

Howard Davidowitz, chairman of New York-based national retail consulting and investment banking firm Davidowitz & Associates, said the move reflects Supervalu’s attempt to keep afloat, as its sales have shrunk the last 18 months.

Both the state of the economy and its 2006 acquisition of Albertson’s, which brought with it a big chunk of debt, have wreaked havoc on Supervalu’s financials.

“The company has problems on a major scale,” Davidowitz said. “Its earnings are in a state of collapse, and its focus is really on its discount division.”

The company announced Oct. 20, in its second-quarter earnings report the plan to build 1,200 more Save-A-Lot stores, the company’s discount banner, in the next five years. Also new in the move is the plan to build stores even in markets where existing Supervalu banners have homes, which the company refrained from before.

Supervalu also plans to mix and match its other banners more than it ever has, Craig Herkert, Supervalu’s president and chief executive officer, said at the earnings report.

Supervalu’s second quarter earnings fell from $128 billion the same time last year to $74 million, a 42% drop.  Its net sales were $9.5 billion, compared with $10.2 billion in the second quarter of fiscal 2009.

The company plans to sink $75 million annually into the Save-A-Lot expansion, which will double the existing amount of 1,200 stores. Its board of directors voted Oct. 19 to reduce the regular quarterly dividend to $0.0875 per share from $0.175 per share to come up with the money.

“Supervalu is totally focused on the trade down, and they should be,” Davidowitz said. “It’s Aldi time, and Wal-Mart continues to gain market share. Today we’re talking about how cheap you can get.”

Although the company’s stock went up 27-cents after the report, Wall Street is still wary of Supervalu, according to media reports. Standard & Poor’s Equity Research changed its ranking to “sell” on the company.

“Supervalu has always been a great distribution company,” Davidowitz said. “They’re the largest food wholesaler in the U.S., and when it comes to food distribution, Supervalu is a pioneer and does it better than anybody. But they have never been a very good retailer.”

“I think, frankly, their future is in question,” Davidowitz said.

The changes to W. Newell likely reflect Supervalu’s changed focus in the current economy and in its current financial situation, he said.

The Midwest-Southeast region, which W. Newell is set to join, is one of three wholesale regions that supplies Supervalu’s banner stores — including Cub, Jewel-Osco, Albertson’s and Shop ‘n Save — as well as independent retailers. Fawcett said the Pleasant Prairie, Wis.-based region is geographically aligned with W. Newell, which has headquarters in Champaign, Ill., and shares many of the same customers.

Supervalu is still working on the best way to structure W. Newell moving forward, and has not named a top executive for the restructured company. In the interim, Bob Cisler, vice president of merchandising for the Midwest-Southeast region, is overseeing the transition, although he is not necessarily overseeing W. Newell, Fawcett said.

Besides Gionnette, John Aune who also had joined W. Newell when it opened as vice president of national operations, lost his job in the restructure, and he left the company this summer, Fawcett said.

Aune held several positions in his career with Supervalu, including vice president of category management, as well as other management positions, according to media reports.

Supervalu is still evaluating the benefits of W. Newell and what could possibly be grown.

“But we always make sure we’re operating most efficiently, and it makes us do things like we’re doing with W. Newell,” Fawcett said.

Plans will be fleshed out in the coming months, Fawcett said. W. Newell headquarters will remain in Illinois, although some of the back office functions will be handled in Wisconsin, she said.

“We’re making these changes, trying to figure out what our path is,” Fawcett said. “But we don’t want to change the legacy of what is W. Newell.”

W. Newell & Co.’s legacy

Supervalu’s entire wholesale and retailing business was built on a produce distribution business that was founded in 1937, Winston & Newell.

When W. Newell was launched in 2005, Supervalu announced it as a new model for produce distribution designed to meet supermarket and wholesale customers’ increasing demands for more variety and higher quality produce.

It was housed in a $25 million, 155,000-square-foot warehouse, and had its own sales and service force. Its original purpose was to run independently of Supervalu’s broadline business.

“This is a very specialized supply chain that has specific requirements on speed to move the product from point of production to point of consumption,” Gionnette said in April 2005. “By developing the company as a standalone operation, it will allow us to develop supply chain solutions that will provide fresher product faster.”

At the time, Supervalu anticipated expanding the idea with produce distribution centers in other locations across the country.

Gionnette on Oct. 22 said he could not comment on the future direction of W. Newell.

“He made a decision to pursue other interests as we moved through the transition,” Fawcett said. “Gary was gracious enough to stay on and help us through the first part.”