(FORTUNE Magazine) – It's late December, and the swish Louis Vuitton boutique near the Champs-Elysaes looks like a discount warehouse. Elegantly dressed shoppers from all over the world paw leather bags while impeccably groomed saleswomen rush to keep up with the demand. Yet there are no post-Christmas sales here. "That would devalue the brand," sniffs Vuitton President Yves Carcelle. A small handbag costs about $450 in leather, $9,000 in crocodile skin.

Le luxe is just as de rigueur elsewhere in Paris. Gilles Fuchs, president of Nina Ricci, points to $1,000 cashmere scarves and notes that at least ten of "these quality products" are sold each day in a single shop. "More people have money to buy beautiful clothes than you ever would expect," adds Robert Bensoussan-Torres, CEO of Christian Lacroix, picking up a hot-selling $1,750 jacket. Alain Dominique Perrin, the Cartier International CEO, reports an increase in demand for $30,000 watches. "People still need special gifts for marriages and anniversaries," he explains.

Luxury, it seems, is rearing its precious little head again, and not just in Paris. The City of Light may still be the capital of luxe, but Greater Asia is the customer with swag. Developing nations such as Malaysia and Thailand still associate old-fashioned cachet with European boutique names like Christian Dior and Yves Saint Laurent.

Even mature markets offer good news. Western buyers are slowly peeling off their early Nineties asceticism and defaulting to their indulgent selves. True, the rules have changed, particularly in the U.S. Ostentation is out, and understated quality has replaced designer exhibitionism. Call it decadent utility, this desire to bounce along in a pricey Range Rover or Jeep Cherokee.

The rules have changed for the purveyors of posh too. Family-owned boutiques with 200-year-old pedigrees are long gone, as are the wanton dealmakers of the Eighties who vulgarized prestige names like Gucci by attaching them to trinkets. The surviving entities are of a different stripe: conglomerates that articulate the language of brand management and asset utilization. Acutely attuned to the difference between mass and class, they have learned to walk the fine line between exclusivity and demand rationing.

Together these influences underwrote double-digit increases in worldwide sales of status stuff last year. Sales jumped 15% and profits almost 20% at Vendome, owner of Cartier jewelry, Dunhill's men's clothing, Montblanc pens, and Piaget watches. Even more impressive, sales at the world's biggest luxury group, LVMH Mo‘t Hennessy Louis Vuitton, rose 20% and profits 36% for the first half of 1994. The producer of Mo‘t & Chandon champagne, Dior perfume, and Christian Lacroix clothes expects full- year profits to increase as much as 20%. Not bad for an outfit selling rags and booze.

"The appetite for luxury is as strong as ever," insists LVMH Chairman Bernard Arnault. "The only difference is that in the 1980s, some people would put a luxury trademark on anything. Today only the best sells." But that's a big difference. Traditionally, the luxury-goods business resembled Hollywood more than Wall Street. Creativity and style, or what passed for them, substituted for management. The ambitious, American-trained Arnault represents the industry's new leadership. He has fashioned a powerful portfolio of chichi labels but remains obsessed with controlling costs, enhancing brand equity, and global marketing.

And building value. LVMH's $14 billion capitalization on the Paris bourse has roared past the $12.2 billion of telephone and train manufacturer Alcatel Alsthom. Yet Alcatel employs 196,500 people and has sales of about $27.6 billion, vs. LVMH's 15,000 employees and $4.6 billion in sales. Says Andrew Shepherd-Barron, a France specialist at Kleinwort Benson Securities in London: "From a hardheaded financial point of view, Louis Vuitton luggage and perfume look like better businesses than telephones and trains."

The transformation of this industry from boutique to big business was accelerated by the shock of the Gulf war and the recession. American consumers in particular began displaying a willingness to substitute sparkling wine for genuine champagne and off-the-rack imitations for designer clothes. A 10% excise tax on luxury goods imposed in 1990 added to the pain.

After years of racking up 25% annual growth, the industry found itself sitting in the lapse of luxury. The Comita Colbert, an association of 75 of France's biggest luxury companies, saw sales growth evaporate in 1991 and 1992.

Although economic recovery has helped, the rebound of luxury in the U.S. reflects a broader shift away from our latent puritanism. Even President Clinton played a part by rescinding the controversial surcharge on all pricey products except cars. Trend doyenne Faith Popcorn, who coined the term "cocooning" to describe the hunkering down of the past half decade, now talks about "the pleasure revenge." "People are sick of being on good behavior, of eating low fat, working out, and being good," she says. "They want something lush and fun, to sleep late just because, to eat a little fat, and to buy cosmetics, wine, and cognac." Popcorn points to evidence as diverse as the 8% increase in sales last year of premium ice creams, and a 10% increase in sales of fur coats.

GLITZY, logo-filled designs are fading in a wide range of goods. Status now resides in enduring value-and utility. "In" products include gold-leafed, microwave-safe porcelain, manual or sports watches, and classic suits. "People want real quality, products with a history and an ethical heritage," Popcorn says. "But they don't want LV stamped all over something."

Louis Vuitton and Gucci have responded by creating new leather goods lines with the status name rather discreetly placed. "People are willing to pay a premium for 400 years of Florentine leathermaking tradition," says Gucci CEO William Flanz. "But they don't want to flaunt it anymore." Gucci's hot new product is not even a fashion handbag; it's a $995 backpack. Says Flanz: "We have taken a utilitarian item that used to be made by others out of nylon, and designed one out of the finest-quality leather."

These days marketers shudder at the idea of becoming trendy. If glittery Rolexes defined the highflying Eighties, TAG Heuer's sober stainless-steel and gold sports watches are emblematic of the down-to-earth 1990s. "The accumulation of wealth doesn't go out of style," says Luc Perramond, Heuer's director of sales. "It just gets redefined." The new definition: stealth wealth.

TAG built much of its recent success by moving upscale, dropping its $100 model and raising the average watch price from $250 to $1,000. Sales are up sevenfold in the past seven years. Heuer's new line tops out at $13,000 for such understated timekeeping.

The new luxury also embraces family values. A decade ago Dior's top-selling perfume was called Poison. Today's new best-seller is Tendre Poison, sold in bottles half the size as before, at a mere $29 an ounce. "The 1980s were the decade of seduction and social conquest," says Maurice Roger, CEO of Parfums Christian Dior. "The 1990s are the decade of intimacy."

The silliness has even gone out of haute couture this year, as designers revert to more classic styling. Christian Lacroix has augmented his calamitous, stratospherically priced clothes with a toned-down, lower-priced line called Bazar. Still, a "gypsy skirt" goes for $390 but extends the line beyond fashion models and rich women who can take a fashion risk on a $10,000 outfit. Says a proud Bensoussan-Torres, the Lacroix CEO: "These clothes are even politically correct in the United States."

The Lacroix boss is alluding to the growing complexity of luxury sales: Globalization plays havoc with some marketers, such as automobile sellers, because the expectations of buyers are no longer homogeneous. When the Japanese began making luxury cars at better prices, pragmatic Americans soon lost their zeal for fancy-and suddenly overpriced-

European brands. Yet the Japanese haven't made much headway against the Europeans in Southeast Asia or Europe. Francois Delvallee of Toyota France says his firm sells only 100 Lexuses in France annually. Succeeding in America entailed building an expensive independent distribution system, a gamble neither Toyota nor Nissan was willing to take elsewhere. "Americans are more flexible and ready to accept new values," says Masaki Sato, a marketing executive at Toyota Europe.

Traditional European luxury is particularly fashionable in Southeast Asia's booming markets. Mercedes's non-Japanese Asian sales increased 350% from 1991 to 1994; BMW is up 41% in the first nine months of 1994. "In Asia, our cars can't be big enough," says BMW's Walter Glogauer, while "in Germany, our big cars are seen as provocative." Cognac sales are plummeting in increasingly alcohol-shy Europe, but in Asia the eau de vie is drunk like wine. Cognac-maker Hennessy has launched new ads in Europe depicting Gilles Hennessy and his warm, well-bred family enjoying an after-dinner drink. Hennessy ads in Hong Kong, by contrast, picture a shimmering mermaid emerging from a pool and morphing into a sex-charged bottle of cognac.

Interestingly, the new ads for Japan are closer to the traditional European than to the flashy Asian pitch. Explains Hennessy marketing manager Michel de Tapol: "In new markets, status still sells. But as the market matures, you have to sell ageless values."

The Comita Colbert says exports of French luxury goods to Asia have doubled in six years, while the U.S. share of sales has fallen from 16% to 14%. In Taiwan, South Korea, Singapore, and Hong Kong, the European marketers are opening scores of boutiques. "Asia is surpassing our wildest expectations by two," says Patricia Turck-Paquelier, international director at Yves Saint Laurent Parfums. Still, caution is in order. In addition to the lesson many learned when the Japanese bubble burst, they also remember how the once juicy Middle East market rode oil prices down.

But for now demand is surging, so Vuitton is building a new factory-in central France. "We don't produce in China, we sell there," says a smiling Arnault. "In our sector you need a European identity, and that means producing here."

Such identities often take centuries to build. Richard Hennessy began making brandy in Cognac in 1765. Current vice president Gilles Hennessy is a seventh-generation family member; President Henri de Pracomtal, a Hennessy grandson, represents the eighth. Louis-Francois Cartier set up a jewelry shop in 1847 in Paris. Less than a decade later, Louis Vuitton began producing made-to-order leather trunks in Paris for the Sultan of Egypt and other royalty.

In the past few years a new generation of executives has swept into these storied companies and booted family legacies like freeloading relatives. Today a family member still leading a namesake business has earned the job. De Pracomtal is a graduate of HEC, Paris's most prestigious business school. "The family feel is important, particularly now when luxury products depend more and more on authenticity and tradition," he says. "But if I weren't competent, Bernard Arnault would not let me stay here."

Arnault personifies the new breed of luxury manager. Although a major force in champagne and cognac, he doesn't drink much. A fashion kingpin, he wears demure, gray suits. As a youth he wanted to become a concert pianist, and to this day the 45-year-old prefers playing Chopin etudes to the Paris social whirl.

The lure of luxe isn't in the bouquet of a great wine but in the prospects of undermarketed or undermanaged brands. Investcorp, a Middle East-financed bank, has made a specialty of turning around high-end properties such as Gucci (leather), Breguet (watches), Chaumet (jewels), Mondi (clothes), and retailer Saks Fifth Avenue. Investcorp took Tiffany private in 1984 for $135 million, sold its famous Fifth Avenue building for $66 million, then floated the company in 1987 on the New York Stock Exchange with an initial market value of $190 million. "We look at luxury companies because they usually have strong franchises that aren't being leveraged," says Larry Kessler, a member of Investcorp's management committee. "Many are small family companies with a lot of debt. We can help with financial restructuring."

Arnault's LVMH gives each brand almost complete freedom to pursue its own vision, a strategy that has its critics, since LVMH owns several brands in fashion and perfume. Arnault looks for synergies elsewhere. For instance, when Lacroix launched its new Bazar line, it subcontracted production to sister company Kenzo.

Keeping a proper balance between volume and scarcity is the hardest trick in the luxury business, and some makers are still recovering from licensing binges that tarnished their labels. Cartier, for instance, first expanded beyond exorbitantly priced jewels and watches to a less expensive line of watches and accessories under the name Les Must de Cartier. Watch production rose prodigiously. But the Les Must line mushroomed to include a wide range of trinkets such as scarves, lighters, and pens-items that devalued the brand. Perrin is now reining in his wayward wares. "We must not begin producing Cartier potatoes," he admits. "The 1990s are about refocusing on legitimate brands with history and identity."

Gucci was among the worst offenders, flooding the market with 20,000 offerings from T-shirts to coffee mugs-and cheap knockoffs of its trademark luggage. "We were putting our names on products that even had plastic," says a shocked Flanz.

Christofle, the revered silvermaker, is still recovering from an ill-conceived expansion into watches and jewelry in the 1980s. "We diverted our focus from tabletop," admits Maurizio Borletti, Christofle's owner and president. "It would have taken us tremendous amounts of cash to successfully change the image of a 164-year-old silverware company." As a small independent firm, Christofle didn't have the cash, and paid the price.

Borletti, scion of a prosperous Italian industrial family, bailed the company out in 1993, taking a controlling interest and bringing in another high-end name, Hermes, as a financial partner. The 27-year-old dynamo has taken a shine to silverware, and pledged that any brand extension will be limited to tableware products. His favorite new product is Microgold, promoted as the first microwave-safe gold-leafed plate. He has reduced production costs by about $10 million annually, laying off a third of the work force and moving all of the (relatively) mass-produced items, such as cutlery, to a modern factory in Yainville, near Rouen.

The company's century-old facility just outside Paris has become a design and service center staffed by craftsmen with decades of training, producing one-of-a-kind items. "It's not terribly profitable," Borletti admits as he examines a worker chiseling a Louis XIV detail on a silver candlestick. "But it's crucial to keeping our skills and image." Christofle expects to break even in fiscal 1994.

Other companies continue to diversify, but they are now careful not to stray too far. "You must renew your line," says Garard Tavenas, president of Lalique, a crystalmaker. "But whatever you do, you must only produce projects with legitimacy." Lalique, created by art nouveau artist Rena Lalique, is currently succeeding in this balancing act. To attract a new clientele that couldn't afford $3,000 crystal vases, the company expanded into small gift items like $96 crystal fish. Now the company is launching a line of jewelry. These products remain legitimate to the brand, Tavenas says, because Rena Lalique himself designed the fish, and started out as a jeweler.

Concomitant with these companies' product strategy is a distribution strategy that again seeks exclusivity and shuns discounting. TAG Heuer eliminated more than 1,500 of the 3,000 retailers in its distribution grid. "Our strategy was to make this brand more elusive and really push for the high end of the market," says Perramond. "We couldn't compete with the low end, the Swatches." Cartier and Gucci pulled their products out of hundreds of stores in the U.S. in an effort to stop discounting by cash-strapped department stores. These vendors are now extending the purge globally, at the cost of significant sales. Says Gucci's Flanz: "We don't want to be anywhere inconsistent with our knowledge base and image."

Producers are increasingly becoming retailers. Louis Vuitton sells its sacs only through a worldwide chain of 177 company-owned stores, an important reason why profit margins rose from about 20% in 1980 to today's 40%. Vuitton President Yves Carcelle says he plans to open stores at a rate of ten to 12 a year. When Tavenas joined Lalique in 1987, it owned only two boutiques. Today there are 30. He says the boutiques cut out middlemen-and more important, preserve the brand's luxury aura. "A boutique or corner in a department store is the only way to be in control," Tavenas says.

Having survived democratization and recession, luxury brands see more growth on the horizon. Jean-Francois Dehecq, CEO of Sanofi, which bought Yves Saint Laurent, says he was surprised by how much room he had to extend the brand. "We weren't doing almost anything in leather," he says, "and we weren't sufficiently present in the U.S." He plans to fix both problems.

But highbrow manufacturers will face a continual struggle to justify the price premiums their products ask. A fancy label alone no longer qualifies. "Vuitton is succeeding because it's the best product out there on the market," insists Arnault. Perhaps. But Gucci is reviving, and it's no coincidence that Nina Ricci, Yves Saint Laurent, and other famous names are launching new lines of leather goods aimed right at Vuitton.

Arnault meanwhile is doing a little shopping of his own; he may have a jeweler on his list. The only things "we will not produce are commodities such as cigarettes," he says. "Whatever we do, the brand still has to be important." But of course. Conspicuous consumption may be out, but snobbery remains eternally in. And as LVMH has demonstrated, what the French call that petit plus can still offer le big payout.