Service with a smile--luxury retailers take over market.

By the time that the tinsel was being swept up after the holiday shopping season of 2003, it was clear that our retail economy had begun to recover. But interestingly, some of the best performers were not the expected players--those that had been showing progress in previous years by serving a broad customer base with basics and promotional priced items--but players in the bridge, quality and luxury sides of the business.

High-end stores like Neiman Marcus and Barneys New York seem to have faired the best. They provide both a uniqueness and an exclusivity of brands that is appreciated by a discriminating customer who can afford the price but also demands personalized and informed customer service. In a shopping mecca like Manhattan, well-known luxury players like Louis Vuitton have placed themselves in new flagship positions on Fifth Avenue. On a smaller scale, Judith Lieber recently announced the opening of its first retail store on Madison Avenue.

Probably the most dramatic addition of a luxury brand on a global scale has been the addition of Asprey on Fifth Avenue, south of Bergdorf Goodman. Described by some as the most expensive store in the world (in terms of rent and build out cost), this new addition sets an entirely new tone to understated luxury and tasteful grandeur. In London, shoppers and analysts alike are holding their breaths for the new Asprey to open on Bond Street. Asprey contains jewelry, watches, home accessories, gifts and men's and women's apparel. It is truly a rising star. But it still does not overshadow the quieter expansions of classic brands like Salvatore Ferragamo.

So what is driving this resurgence of luxury? Luxury had never gone away, although it had become less obvious. During the tougher economic times, luxury brands continued to enjoy a high degree of loyalty from existing customers who could afford not to compromise. These brands also strive to connect with customers in relevant ways. A perfect example is Hermes' recent hiring of Jean-Paul Gaultier, which has the potential to do for Hermes what the hiring of Tom Ford did for Gucci.

Of course, there are practical reasons to be found as well--recent changes in U.S. tax laws have favored those in higher income brackets. In addition, there has been a resurgence in stock portfolios and higher bonuses. Another factor is the sophisticated baby boomer who is experiencing the transfer of wealth from his/her parents and has more time--and money--to spend on himself because the children have grown up. There is an aspirational aspect to it all, with middle and upper middle income consumers purchasing luxury brands of all types. These consumers are continually bombarded with advertising and entertainment touting the glamour of certain brands of apparel.

But where will this growing affinity for luxury take the industry in 2004? At this stage it's too early to tell. Many financial analysts feel that sales growth will crest in the first half of the year, as tax refunds and capital gains taxes provide consumers with more spending money. Of course, this extra spending will likely decrease later in the year.

On the expansion side of things, those who are doing well will continue to expand and reinvigorate their brands in creative ways, such as reaching out to younger consumers. For example, Tiffany & Co. is experiencing success in branding such items as heart charm bracelets and other signature pieces that are both appealing and affordable to younger consumers.

It is likely that we will also see certain larger retailers that have not been identified as luxury players in recent years, like Lord & Taylor, Brooks Brothers and Bloomingdale's, adding more high quality, private label clothes with appeal to a well-heeled fashion customer. These will be looked on to improve customer penetration with younger and more "hip" segments of the market and also provide these traditional retailers with an avenue to distinguish themselves from competitors.