Supervalu is going back to its wholesale roots, for better or worse.

When the struggling Eden Prairie-based firm unloads its four largest grocery chains in a pending $3.3 billion deal, the company will again rely on wholesaling for almost half of its business. Wholesaling has accounted for only about 23 percent of total sales in recent years.

The problem: Food distribution is a shrinking industry, as Supervalu can attest. Its own wholesale revenue has fallen 17 percent in the past four years, to $8.2 billion in fiscal 2012. A good part of the decline stems from the gradual loss of a big customer, Target.

But also, many of Supervalu's wholesale customers are beset by the same woes that caused Supervalu's own retail downfall: an onslaught of competition from Target, Wal-Mart and other low-price chains, combined with a soft economy.

"Their core market is shrinking," said David Livingston, a Wisconsin-based supermarket industry consultant. "The wholesale business is not growing because the number of retailers is declining. ... I don't think they can make it grow."

Supervalu, not surprisingly, disagrees. The company says it remains primary supplier to some of the nation's "premier" independent grocers.

"Despite the challenges with the economy the last several years, these independents continued to grow their sales and open new stores," Supervalu said in a statement to the Star Tribune, declining to make an executive available for an interview.

Supervalu last month announced it will sell its four largest grocery chains to Cerberus Capital Management for $100 million and the assumption of $3.2 billion in debt. Cerberus, a private equity outfit, will also buy up to 30 percent of Supervalu's stock.

Some sort of deal had been expected, as Supervalu put itself up for sale in July, the result of steadily falling sales and a tanking stock price. The sale to Cerberus will leave Supervalu looking much as it did before an epic 2006 buyout of most of Albertsons Inc. That debt-laden acquisition transformed Supervalu into one of the nation's largest food retailers, but it ultimately failed.

The major chains Supervalu picked up in the 2006 deal -- Jewel, Albertsons, Acme and Shaw's -- will go to Cerberus, as will distribution warehouses dedicated to those chains.

Cub Foods in the Twin Cities and four other smaller chains will remain with Supervalu, making up 28 percent of its future sales. So will Save-A-Lot, Supervalu's national discount chain, which will constitute 25 percent of revenue.

Wholesale will supply the remaining 47 percent. Stock analysts are betting on Save-A-Lot to fuel Supervalu's overall growth, but the wholesale business is hardly an afterthought.

"It will be a very key point for the company -- whether or not they grow in wholesale," said John Dean, a Twin Cities supermarket industry consultant.

Growth will be a challenge, given the slow growth of retailers served by Supervalu, Dean said. Yet Supervalu will be able to focus more on its wholesale business after the Cerberus sale closes.

"In the past, Supervalu worked very hard to make independent [grocers] stronger," Dean said.

After the 2006 Albertsons' deal, some independents "may have felt they were being slighted, and to a point, that's kind of natural," Dean said. "In no way am I saying [Supervalu] didn't do a good job. But its focus was more on paying debt and becoming more of a retailer."

Long history

Supervalu is rooted in the wholesale trade, dating to the 1926 creation of Winston and Newell Co. That wholesaler ran the first modern grocery warehouse in Minneapolis. Winston and Newell was rechristened Super Valu in 1954.

Today, Supervalu is the nation's third-largest grocery wholesaler, with strongholds in the Midwest and parts of the East and South.

Regional grocers with at least 10 stores account for roughly 45 percent of Supervalu's wholesale business; the rest comes from smaller chains. Forty-four percent of Supervalu's top 25 wholesale clients have been with the company for over 20 years.

Major Twin Cities customers include Lunds/Byerly's and Kowalski's. Supervalu operates a sprawling, high-tech distribution center in Hopkins, which supplies independent grocers as well as Cub Foods stores.

Grocery wholesaling is a reliably profitable business, albeit often with peapod-thin margins. But it's waning: The U.S. industry's annual revenue, currently about $104 billion, fell 2.3 percent on average annually from 2007 through 2012, according to a recent report by IBISWorld, a market researcher.

Over the next five years, average sales are expected to decline only 1 percent a year, largely due to an improving economy, said Agata Kaczanowska, an IBISWorld senior analyst.

But underlying factors gnawing at the wholesale industry -- intense competition and rising food production costs -- will continue. Those factors are driving food manufacturers and ever-expanding retailers to "cut out the middleman," according to the IBISWorld report.

"As manufacturers and retailers become more involved in distribution, demand and revenue for the grocery wholesaling sector declines," the report said.

Key customer

Supervalu knows the situation firsthand. The company distributed cold products -- meat, produce, dairy and frozen food -- for Target, as well as a limited amount of dry groceries.

But as Target expanded in grocery, it began moving toward self-distribution about four years ago. Now, Supervalu has only one distribution facility where it handles logistics for Target, in Texas. That agreement ends this spring.

Target was Supervalu's "single biggest customer," Dean said. "It's difficult to make up for that revenue."

Target's gradual exit helped lead to a 21 percent reduction in the number of stores served by Supervalu's wholesale division since 2004. Consolidation in the supermarket industry contributed to that decline, too. Supervalu's well-publicized woes haven't helped, either, Livingston said.

"It is a financially distracted company, so a lot of retailers are not excited to hook up with them," he said. Still, Supervalu has added more independent grocers than it's lost in the past two years.

And Supervalu CEO Wayne Sales said in a recent conference call with stock analysts that he expects the wholesale division "to capitalize on higher margin opportunities, including providing more services and private-label product offerings."

Services to retailers include marketing, accounting and store design. Supervalu has overhauled its private-label program in recent years, expanding it and rebranding myriad offerings under the moniker, "Essential Everyday."

The change is aimed partly at improving promotion of the products. And it's working, the company said in a statement. "Wholesale customers have fully embraced Essential Everyday and are actively promoting the line."

Mike Hughlett • 612-673-7003