Milan—When luxury-goods maker LVMH wanted to defy gravity in a tough time for luxury retailers, it looked to Japan for inspiration. Louis Vuitton handbags with smiling-blossom designs became hot sellers as the colorful work of artist Takashi Murakami reworked the classic LV logo. The move was a big hit for parent LVMH, and the Murakami line soared to about 10% of Louis Vuitton's revenues.

Vuitton's design move represents an astute effort to tap into local European and American consumers' fascination with Japanese culture. And it comes at a time when luxury-goods brands, long used to setting the pace for taste, are finding the only sure path to growth today lies in a science that lower-brow consumer-goods manufacturers and retailers have long been forced to rely on: understanding the local customer.

What happened? After seven years of continuous expansion at 10% a year, the luxury market went flat. It hit a plateau in 2002 at 132 billion euros, amid a global economic slowdown that lowered tourist flows in classic expansion markets like international airports and luxury shopping meccas. (Think: Place Vendome in Paris, New York's Madison Ave. or Tokyo's famous Ginza Namiki Dori.) That shouldn't shock. But a recent study by Bain also revealed major shifts in consumer preferences that hold implications for both manufacturers and retailers. First and foremost: Luxury has gone local.

September 11, 2001, was a fulcrum point. Prior to the terrorist attacks, tourist flows anchored the consumption of luxury goods, especially in Europe. More than 60% of customers in Europe's capitals were foreign. Nowadays, with tourism depressed and world travelers' share of luxury buying down, clearly purveyors need to reset their sights. They need to pay more attention to local customers they may have overlooked and reconnect with former "tourist" customers back in their home towns.

The proof is in the financial results of the companies that reacted early to market shifts. For the vanguard, going local hedged losses, or, in some cases, paid gold. While the companies with high exposure to tourist flows saw growth grind to a halt in 2002, growth at the manufacturers that were more rooted in local markets merely slowed (to 3.1% from 7.5%). The same story played out regionally. In the U.S., where tourist flows anchor luxury sales, the market fell 4%. But in Europe, with its many locally produced brands, the market grew 3%.

Italian fine jeweler Pomellato is a case in point. The 67 million euro company grew by more than 15% in 2002 by developing an annual signature collection to drive local traffic into stores and by taking its wares to wealthy neighborhoods through trunk shows and store events. It reinforced these efforts by building strong relationships with its specialty retailers, actively helping them to understand local customer needs. Pomellato is not alone. Luxury goods retailer Loro Piana is so tuned in to the needs of its most valuable locals that it extends them tailored services from made-to-measure suits to sailors' uniforms and boat interiors for their yachts.

Proximity to customers, both physical and mental, has become bedrock for rebuilding luxury's growth. Before, consumers wanted a product and a label. Now they want service, innovation—like Vuitton's Japanese motif—and special events. They want to feel close to a brand and have a relationship with the salesperson behind the counter.

What does this mean for retail strategy? In the past decade, luxury brands have aggressively built international retail networks both to sell wares and to advertise their brand. Now they need to think about those networks differently, reposition them as "chains of local stores" and extract organic growth from them. This is hard, but necessary work, with implications for the salespeople that luxury makers and their retailers deploy, the information technology that they use and the product value they offer.

First, they'll need a front line able to synthesize large amounts of customer and cultural information to understand and react in real time to trends, fine-tune local service and offerings and build loyalty among valuable local customers.

Second, customer relationship management systems, which harness technology to identify and build loyalty among attractive customer segments, offer the surest help as global companies create local strategies. The right CRM system could, say, trace tourists who once bought perfume in Singapore's Changi Airport back to their home in the Rhineland, and connect them to their Dusseldorf boutique. There are a few players who already understand this and are moving quickly. One example is Ermenegildo Zegna, a 700 million euro high-end menswear retailer, with stores from Moscow to Shanghai and New York, which has used CRM to segment and track customers and, as important, has created a process to convert CRM data from its retail network into decision-making in its stores. In so doing they unearthed new segments with high potential and adjusted their marketing plans accordingly.

Third, once in the fold, local customers are far more demanding on product innovation and pricing: our research depicted an independent shopper, mixing cheap with chic, and cherry picking bargains. Consequently, they are impacting some product categories more than others. As the first rung of fashion, designer spectacles are within reach of most, and more consumers are reaching for them. Sales in this category grew 3% in 2002, despite a flat market overall. Another category shift: more men are buying their own clothes, and women their own jewelry, and on more occasions. On such trends, menswear and jewelry both notched up 1% growth last year while other categories shrank.

All this is pushing up analysts' predictions for annual sales at luxury manufacturers and retailers like Vuitton that are adjusting their approach and their products to connect with local customers. As for brands not yet galvanized for change, it's not too late to consider a New Year's resolution.

Ms. D'Arpizio, based in Milan, is a senior manager and luxury goods specialist with Bain & Company's consumer products practice.