Here's my interpretation of the process.
See if this helps...it worked for me just now, with some dummy folders.
(I think this is all of the steps... "I think"
Click on the Customize Photo Gallery link
Create your new folder
Make new sub folder
Click icon to move folder
Select where you want sub to go in pop-up window drop box
New sub folder ready.
Check your Gallery to see if it's there...
Bingo!