Luxury makes a comeback

NEW YORK (Fortune) -- Here's what the financial crisis sounds like at the top of the income ladder: When asked how the recession had impacted her life, one banker's wife said, "The waiting list for a Birkin bag is a lot shorter."

She was referring, of course, to the coveted Hermès handbag. Each bag is hand-stitched and takes weeks to make, which keeps supplies scarce. For the unconnected -- those who are not socialites, celebrities, or super-wealthy -- the waitlist can run two years or longer. Starting prices are around $5,000, but versions made of exotic skins, such as crocodile, command well into the six figures.

Even though conspicuous consumption is out of style, people are still buying Hermès bags. Third quarter sales were up 10% -- a reminder that people are willing to splurge on products they consider worth the price.

It's a lesson many luxury firms forgot during the boom years when, in an effort to expand market share, they courted the mass affluent -- upper-middle-class customers who aspired to a more luxurious lifestyle than they could actually afford. "The luxury market went mass," says Pamela Danziger, the founder of Unity Marketing.

Milton Pedraza, CEO of The Luxury Institute, calls the recent overreaching "faux luxury." And, he says, a lot of companies forgot what luxury was all about. "They just slapped a logo on a canvas bag," Pedraza says. "The products were expensive, but the quality was not very good."

Now a handful of companies are trying to put the "lux" back in luxury by introducing products with more handcraftsmanship and detailing. Sure, these products cost more. But the companies that make them are betting people will be willing to spend more to get more.

Take Jaguar, for example. After going for the middle market with $30,000 cars in the 1990s when it was owned by Ford (F, Fortune 500), Jaguar -- now part of India's Tata Group -- is repositioning as more of a true luxury brand. The XJ Sedan, which is scheduled to hit dealer showrooms this spring, will carry a sticker price of $72,000 to $115,000, making the XJ Jaguar's most expensive car on the market.

Jaguar chief designer Ian Callum has given the XJ a more modern look without skimping on the wood and leather that harks back to the brand's heyday of British luxury. The XJ's audiovisual system includes a 1,200-watt stereo and comes with headphones that allow each passenger to listen or watch what he or she wants. (Just imagine how many family fights could be averted if Dad got his dose of classic rock, Mom her Streisand, and the kids Hannah Montana.)

"The car's interior is nicer than many living rooms I've sat in," says Michael Silverstein, a senior partner with the Boston Consulting Group.

Jaguar only expects to sell 8,000 of the XJ Sedans, compared with 30,000 of the more mass-produced cars it used to make. But sometimes less is more. "With this economy, you've got to give high-end shoppers a reason to buy," says Jaguar spokesman Stuart Schorr. "You do that by making the car more interesting, more indulgent, and more luxurious."

Sunglasses-maker Oakley, though not considered a traditional luxury firm, is also going against the tide by adding more expensive products to its lineup. In November, Oakley introduced the "C Six," a $4,000 pair of sunglasses made from 80 layers of carbon fiber that mold to your face. (Spokeswoman Brianne Bates calls the glasses an "engineering feat.") The C Six sell for six times the price of the company's previously most expensive glasses.


Likewise, this fall, Restoration Hardware launched the Artisan Collection, which includes more expensive items than its traditional fare, including a $4,000 trunk that doubles as a portable office. CEO Gary Friedman recruited craftsmen from around the world to create the collection and give it a handcrafted feel. All of the brass nail-heads on the trunk, for instance, are hammered by hand.

The Artisan Collection -- which also features $1,500 end tables and blankets made of Mongolian cashmere and stitched on ancient looms -- is popular enough that Restoration Hardware has extended the line through the spring, and it may stretch beyond that. "Gary (Friedman) feels that if people are going to spend money, we should give them a step up in quality," says spokeswoman Ashley Boyle.

Not all firms are brave enough to buck the tide of falling luxury sales -- expected to decline 8% this year, according to Bain & Company -- and claw their way back up-market. Saks (SKS) and Neiman Marcus, for instance, which both courted those mass affluent consumers during the boom, are capitalizing on a "trading down" effect during the bust by adding even more "affordable" merchandise to their stores.

But there are a handful of companies moving in the opposite direction by appealing to consumers who still have money. And despite uncomfortably high unemployment, there are plenty of them. After all, those record Wall Street bonuses aren't going to be spent at Wal-Mart.