(Business 2.0) – Borders Group used to pride itself on stocking its bookstores with the widest selection possible in a brick-and-mortar establishment. In its cooking section, for instance, there were always more than 10 titles about sushi, including Sushi for Parties, the more supportive Squeamish About Sushi, and The Encyclopedia of Sushi Rolls, a definitive tome that explains, among other things, how to spell your name in makimono.

Now, Borders is planning to yank half of those sushi how-tos from its shelves. Why? In part because HarperCollins, the nation's third-largest publishing house, told it to.

Welcome to the world of "category management," a bizarre and controversial place in which the nation's biggest retailers ask one supplier in a category to figure out how best to stock their shelves. You'd expect HarperCollins to tell Borders which of its own books are hot, of course. But that's not what's going on here. Borders has essentially tapped Harper to advise it on what cookbooks to carry from all other publishers as well.

Strange as it may sound, category management is now standard practice at nearly every U.S. supermarket, convenience store, mass merchant, and drug chain. And its use is growing because it works--at least from a dollars-and-cents standpoint. According to a recent survey by retail consultancy Cannondale Associates, retailers attribute 14 percent sales growth to category management; manufacturers report an 8 percent jump. Both say such collaboration is the key to maximum efficiency.

But many observers of the retail space are beginning to question the practice, charging that it is the driving force behind a cookie-cutter marketplace in which Safeway, ShopRite, and Save Mart all carry the same stuff. In their view, category management is retail's Faustian bargain: Lured by the savings and convenience of getting manufacturers to mind the store, retailers have ceded not only responsibility for their shelves but also any hope of differentiating themselves. Carrying the argument beyond the homogenized consumer experience, some small vendors charge that category management systematically denies them shelf space because they have less access to crucial data. Forget about operating-system monopolies, they say: Retail is the battlefield on which the war between efficiency and consumer choice is being fought now. "The Kremlin would have found it difficult to invent a more subtle and effective way of suppressing original viewpoints and ideas," wrote 29 scholars and activists led by Ralph Nader after hearing of the Borders plan. So is category management a salvation for retailers, or a Trojan horse whereby manufacturers are quietly co-opting the point of purchase?

In the beginning, there was Schnucks. Founded in 1939 by Anna and Edwin Schnuck, the supermarket chain was a local success in St. Louis, but by 1985 its 60 stores were fighting for survival. On one front, Schnucks was waging coupon-to-coupon combat with Kroger, then the nation's second-largest retailer. On another, it was taking on convenience stores, which had surpassed supermarkets in number in 1979. To make matters worse, there was no place to grow: Some 31,000 supermarkets were operating nationwide, virtually the same number that exist today.

So when Australian-born Brian Harris, then a USC Business School professor, came calling with an idea to boost sales, the Schnuck family listened. "The Aussie accent added to his intrigue," says Scott Schnuck, the founders' grandson who was then marketing VP and is now president.

Harris was peddling Apollo, a PC program he wrote that calculated the optimal amount of shelf space for each product in a category. For a retailer, this was better than Christmas: Previously, supermarket managers tended to allocate shelf space on a mix of gut, favors, and payoffs.

But competition and the sky-high interest rates of the early '80s made painfully clear the cost of slow-moving items. "When you have funds tied up at 22 percent," Harris says, "you suddenly start thinking about inventory not as boxes but as money." Acting on Apollo's advice, Schnucks gave more space to hot-sellers in its baby-food section and saw sales jump 20 percent. Soon Schnucks was using Apollo for all of its categories, and by 1987, Kroger had withdrawn from St. Louis.

In truth, Apollo wasn't very sophisticated. But it did give rise to a truly revolutionary idea: that a retailer could boost results by managing itself not as a collection of products, but of product categories. The distinction is key: People don't shop for soft drinks the same way they shop for meat. In one instance, it may be most effective to group brands together; in another, freshness is most important. Thus, instead of one storewide marketing plan, retailers realized they could do better by giving each category its own--its own consumer research, its own pricing strategies, its own performance goals.

With nearly 250 categories and a staff better skilled at stocking products than marketing them, even a Stanford MBA like Scott Schnuck needed help. In his baby-food aisle, for example, he got Heinz to run Apollo, interpret its output, and recommend changes. Heinz had the know-how: Manufacturers were already scouring national point-of-sale data from ACNielsen to glean consumer preferences. And Heinz's interest in the project didn't wane when the data supported nixing some Gerber losers to clear room for Heinz baby food.

Harris went on to co-found the Partnering Group, a consulting firm in Cincinnati, to develop and teach what he had begun calling category management. The company name was a nod to the fact that, like Schnucks, most supermarkets tended to choose one vendor in a category--what they called a "category captain"--to tackle the workload. In 1994 the consultancy ran the first industry-sponsored pilot at Maryland-based Giant. In the trial, Coca-Cola, the category captain in beverages, deleted 50 poor-sellers from Giant's shelves--inflicting casualties across brands. Coke also added 10 new drinks--again, its own and those of other manufacturers--that, according to Nielsen data, were selling well at Giant's competitors. Procter & Gamble, the detergent captain, made similar changes. In both categories, Giant regained market share it had lost to Wal-Mart. "That really validated the model," Harris says. Today every major U.S. consumer-packaged-goods retailer, from Albertsons to Petsmart, practices category management. Even at Kmart, Target, and Wal-Mart, what you see on the shelves is largely the result of recommendations by category captains like Gillette, Nestle Purina, and SC Johnson.

Of course, it's understandable that a regional chain like Schnucks might lack the resources to manage categories on its own. But Wal-Mart? The mass merchant refused to talk about category management. But manufacturing executives who have worked as category captains speak of what a gargantuan task managing a category has become. These days captains handle not only product assortment but also promotions and shelf layouts. SC Johnson reportedly employs six people just to manage Wal-Mart's household cleanser category. "As a retailer, you get the best minds in the business working for you free of charge," says a former category manager for a major consumer-products manufacturer. "Why not take advantage of that?"

By all accounts, the best retailers are far from passive when it comes to accepting vendor recommendations. For one thing, Wal-Mart usually runs the captain's plan by a second supplier, known as the "validator." So Dole, for instance, runs a reality check on what Del Monte proposes. Even more important, Wal-Mart insists that captains adhere to its "Always Low Prices" strategy. A former captain in Wal-Mart's beauty care aisle says he advised Wal-Mart to raise prices on its private-label items but was rebuffed. "Their philosophy is to sacrifice short-term profit for long-term low-price positioning," he says.

Still, manufacturers say they want to be captains for one simple reason: influence. Although an overt move to clear the decks of competition would result in a competitor mutiny and a subsequent discharge, being captain secures a seat at the retailer's table when key decisions are made. "Sometimes the data isn't terribly clear on what to stock," said a major consumer-products executive who has managed categories at Wal-Mart and Kroger. "As captain you can frame the discussion to get what we call 'a favorable bounce.'"

Not every retailer has the strategic focus of a Wal-Mart to keep a captain's power in check, though, especially in non-core categories. And that's where antitrust fights are erupting. Last May a federal appeals judge upheld a $350 million damages award against U.S. Tobacco, the nation's dominant vendor of moist snuff, citing evidence that as category captain the company duped retailers into giving its products more shelf space by misreporting sales. In a case currently pending, a group of tortilleros is suing Gruma, tortilla captain throughout much of the United States, for similarly shutting out competitors.

And it's becoming more and more tempting for retailers to simply outsource their categories to captains. That's because companies like Clorox, Kraft, and P&G have spent so much money developing captaincy capabilities that it's hard for a cash-strapped retailer to argue with their recommendations. "That's happening a lot," says a marketing executive at a top-five supermarket chain. "But any retailer who lets their vendors run the show is doomed to fail the blindfold test."

The blindfold test: You lead a blindfolded shopper to aisle five, remove the blindfold, and see if she can identify the store she's in. Even his own company, the supermarket executive says, has allowed vendors to take the helm, thereby making its aisle fives indistinguishable from the competition's. And he's not the only one who speaks with disappointment about that.

"Retailers who delegate category management to suppliers will never give customers a reason to shop their stores," Harris says. "This was supposed to be a tool for retailers," not an excuse to abdicate.

And yet, category captains are proliferating. Category management is finding its first foothold in books and music for the same reasons it took root at Schnucks: new competition (Amazon, Wal-Mart), a bad economy, and a CEO who knows Harris.

Greg Josefowicz rose from grocery bagger to president at Jewel-Osco supermarkets before taking the top job at Borders three years ago. He helped Jewel implement category management, which he first learned about at a 1991 talk by Harris.

"Rather than build strategies for this thing called 'books,'" he says, "we have to meet customer needs within more finite segments." Publishers' in-depth category experience, he asserts, makes them a necessary part of the process. The sushi-book cuts, for example, came about because HarperCollins helped Borders pore through consumer interviews to discover that too many titles on a specific subject were overwhelming people. "That's a classic category management result," says HarperCollins VP for sales Josh Marwell, who participated in the analysis. "You may not need as many items in the category."

Borders so far has appointed "lead suppliers" in 20 categories--including Random House (kids), Pearson (computer books), and Sony (easy-listening CDs)--and is on track to roll out the program storewide by 2004. If the supermarket and mass-merchant experience is any guide, what that means for Borders and its customers depends on whether the bookseller can remain the true captain of its categories.

Toward that end, Josefowicz has hired Harris's Partnering Group to train its employees on how to market a category. He also insists that Borders has final say over the titles it stocks. And he says he'll be updating analysts every quarter on how things are going. Of course, if you miss his calls, you can always visit a Borders store to see how category management is working out.

Don't forget the blindfold.