• by Thom Forbes , January 11, 2011

I woke up Sunday morning at the ungodly hour that I do when I'm writing this column with an unlikely vision in my head. I was attaching a pearl necklace around a woman's neck. She was beaming. "What's the headline here?" I asked. "The Smile of Acquisition," I told myself before wisely rolling over. But I've been mulling the state of the luxury market ever since.

I will leave it to the academics to explain why people buy things they don't really need, and to the shrinks to tell me why I chose such an anachronistic symbol as a string of pearls to represent this tendency, and will instead concentrate on some commentator's thoughts about where this market is heading. It does, after all, account for a disproportionate amount of sales.

Last October, Bain & Co. proclaimed an end to the "global crisis in luxury goods sales," which it said was the first year-long decline it had seen during the nine years it has released its "Luxury Goods Worldwide Market Study."

In its coverage of the National Retail Federation's annual conference this morning, Stores reports that sales of premium brands did much better over the holiday season that did those of mass-market goods.

But Mark Greene, CEO of Fair Isaac Corp. and moderator of a panel on the state of the economy, makes two points that we will return to at the end of this piece. The first is that the "new normal" customer is likely to be less loyal to brands than customers have traditionally been. The second is that KYC, or Know Your Customers, will "soon become an article of faith to retailers."

Indeed, the growth in the luxury market last year may not be all it has been cracked up to be. The Bain report makes clear that a lot of the increase had to do with the depreciation of the euro. Plus, the boost was fueled largely by retail stores owned and managed directly by luxury brands.

"The shift from wholesale to retail shows that luxury brands have much more control over their own fates, but also much more responsibility," said Bain partner and lead author Claudia D'Arpizio. "We are going to see a decade where the balance shifts to brands that have the best retail management, the best shopping experience, and the greatest capacity to invest."

The movement of brands into controlling positions in the retail environment is not limited to traditional luxury products like watches, clothing and accessories, of course. I'm thinking Apple, Bose and Sharper Image, for example. It also involves lower-end goods like pop-up stores for Levi's and services like Mr. Clean Car Wash.

Still, times are indisputably better than they were. Neiman Marcus reported last month that its first-quarter profit had tripled to $25.7 million over the year before. Web and catalog sales were particularly robust, seeing a 13% increase. Neiman Marcus CEO Karen Katz told The Wall Street Journal that the retailer's most affluent customers had "resumed many of their shopping habits from the boom, including splurges on ultraexpensive items."

But in a forthcoming book, Putting the Luxe Back in Luxury, Pamela N. Danziger argues that the old days are dead and gone, and luxury marketers who expect things to simply return to the way they were for at least a decade are in for a rude awakening. In the introduction to the book, which is available for download here, Danziger writes that "their customers are fundamentally different than they were just two or three years back and the coming luxury customers that they expect to build a bridge to the future are nowhere near as prevalent as they once were."

The cause of this "luxury drought," as she dubs it, is threefold: changing demographics, a change in purchase behavior and a shift in consumer's psychology. "In my many years of consumer research, I have never faced a business segment so under- and mis-informed about the customers served. Marketers' fantasies about how the luxury consumer lives and behaves cloud their judgments," Danziger writes.

The message is that you'd better pay a lot more attention to the changing wants of your customers and a lot less to your own pie-in-the-sky projections. The rich indeed may be different from you and me, but they, too, will be spending less and thinking differently.

"In the future, luxury marketers must forget about aspiration," writes Danziger. "The new challenge is to give customers inspiration for their brands and their products."

Pearls may not cut it anymore, but neither do a lot of other things that did just a few years back.