Isn't what matters that it's a great story well told?

Indeed. It seems to me that it's a distinction that's useful primarily to marketers and not much of anyone else.

If there's a difference in the work itself, I'd say off the top of my head that "genre" fiction tends to start off with slightly more outlandish (not the right word, but I'm too busy to find another) "what-ifs" than "literary" fiction. (To borrow from the aforementioneded Zone One: "What if Zombies took over Manhattan?" rather than "What if there's this disaffected guy who has to work his way through a difficult job in a military zone?")

I'm of two minds about this distinction -- on the one hand, it's artificial, and as squibstress says, as much a marketing ploy as anything else. And if course, it has the problems of all binaries in that it can create a false either/or situation, and we inevitably end up privileging one category over the other.

But on the other hand, I think there *are* differences in writing -- broader vs. narrower audiences, different expectations, different topics -- and it can be useful to have a vocabulary that allows for distinctions. If only we could do it without the automatic assumption that one form is better than another, of higher writing quality, etc.

I think it's more a matter of the expectations for each type than the particular style, necessarily. With "popular" or genre fiction, especially of the best-seller type, it seems to me that those works are expected and meant a) to be fairly predictable, b) not to do much to challenge the status quo, and c) to end relatively happily. For instance, you could write the most well-written formula romance ever, but it can't end with both protagonists miserable or dead. When people read popular fiction (and they are often the same people who read "literary" fiction; I'm not constructing a hierarchy of audience) -- when people read popular fiction, they do so because they expect certain things and want a certain effect (they want to be comforted, or they want escape, or they want to be reassured, or they want to be scared in a safe way, or the want a cathartic good cry without too much misery, etc.) Thus writers of popular or genre fiction need to produce that effect. With so-called literary fiction, though, we're often reading for different reasons and with different expectations. Thus the works can be can be less predictable, less expected, can be unsettling or disturbing in ways that we don't usually want popular fiction to be.

There are exceptions, of course, but in general, I see the distinction as more one of what we expect each work to do and not necessarily about the complexity (or lack thereof) of style or plot or theme.