is on just how much consumers will spend this holiday season amid a weak economy. At the

same time, our economics correspondent, Paul Solman, is finding a fundamental change taking

place in the world of retail. It's part of his ongoing reporting Making Sense of financial

news. WILLIAM MCCOMB, Liz Claiborne: The Kate Spade shopper loves color and she loves sparkle.

PAUL SOLMAN: CEO Bill McComb runs the Liz Claiborne company, which owns premium brand

Kate Spade. WILLIAM MCCOMB: This is a Sparkle Gia bag, which is selling out in all of our

stores right now. PAUL SOLMAN: At $95, a steal, since Kate Spade bags can cost $500. WILLIAM

MCCOMB: This is one of our classic items. It's a quilted paneled leather with a beautiful

chain with leather inside. PAUL SOLMAN: In a limping economy, $298 shoes? WILLIAM MCCOMB:

But it's not just a regular pump. Look at the twist on the back. PAUL SOLMAN: Once a

50-brand conglomerate, in the fall, Liz Claiborne, Inc., announced that the teetering mid-market

company would unload almost all of its divisions, including those that catered to its once core

middle-income shoppers, like the Liz Claiborne brand itself, sold to J.C. Penney. WILLIAM

MCCOMB: What you're finding in the marketplace today is that those that are chasing the value

customer and those that are in effect pursuing the high-end customer are doing the best.

Those in the middle are really getting squeezed at both ends. PAUL SOLMAN: And that's what

Liz Claiborne was. WILLIAM MCCOMB: Liz Claiborne absolutely was focused in that middle. It

became very clear, sort of a blinding clarity, that we needed to pick a direction to go,

because that middle was no man's land. PAUL SOLMAN: So, the firm went upscale and is staking

its corporate life on provisioning the posh: Kate Spade, Lucky Brand Jeans and Juicy Couture.

WILLIAM MCCOMB: Our focus on great brands brought us to a market segment of the higher

end, accessible luxury consumer. And even though the economy's bad, they're spending

money. They have disposable income to spend. PAUL SOLMAN: It should come as no surprise

to those following the economic inequality debate. Retail is increasingly bifurcated

into high-end and low, with an ever-shrinking middle, forcing do-or-die decisions on companies

like Liz Claiborne. WILLIAM MCCOMB: If we were still supporting the 50 brands that we

had, we would have had to declare bankruptcy. PAUL SOLMAN: But designer jeans are still

selling. Direct-to-consumer sales at Lucky are up 23 percent year-to-year because it

has status value. WILLIAM MCCOMB: One of the staple trademarks is the "Lucky You" label

right inside the zipper. PAUL SOLMAN: Investors also seem to like the high-end trademarks.

Since the Liz Claiborne makeover, its stock is up dramatically. Now, an upscale focus

is no guarantee of future performance. Though sales are up at Kate Spade and Lucky Jeans,

they're not at Juicy. And the company still posted a loss last quarter. But the point

is, Liz Claiborne could see clearly that the middle market had lost its luster. Luxury

spending, by contrast, is on the up and up. MILTON PEDRAZA, Luxury Institute: It's been

up since 2010 and it's been up essentially for many brands 10 percent to 15 percent in

the U.S. PAUL SOLMAN: Milton Pedraza tracks high-end consumption. MILTON PEDRAZA: There's

been a flight to quality and a flight to pedigree. So the Guccis of the world, the Louis Vuittons,

the Chanels, all the brands that we think as classic have done far better than brands

that are let's say not so pedigreed, don't have a long history, don't have classic products.

PAUL SOLMAN: The well-heeled can and will up the ante to demonstrate their prosperity

in a high-low economy, it seems. And sales are climbing at high-end retailers. Saks Fifth

Avenue stores are up 9 percent year-over-year. CEO Steve Sadove on FOX Business News. STEVE

SADOVE, Saks Fifth Avenue: We're seeing very good performance in areas like handbags, shoes,

accessories, jewelry. And we're seeing the best full-priced selling we have seen in years.

And, in fact, what we're seeing is the customer going towards the more special, differentiated,

best, unique products. PAUL SOLMAN: At Neiman Marcus, profits in the most recent quarter

surged 88 percent over last year. And fantasy gifts in Neiman's annual Christmas book are

selling like hotcakes, exorbitant hotcakes. A custom library for $125,000 sold -- all

five $5,000 private Johnnie Walker tasting packages, gone in two days -- 10 special edition

Ferraris with custom-made luggage to match the cars leather interior, $395,000 apiece,

snatched up in 50 minutes. But in an increasingly high-low economy, says luxury maven Pedraza,

such spending may pay off. MILTON PEDRAZA: When somebody walks into a negotiation, and

they get out of their Ferrari, Enzo Ferrari, and they may have a very high-end watch, it

isn't just showing off. It is showing off to make a point. PAUL SOLMAN: And what's the

point that's being made? MILTON PEDRAZA: That, I have power. I, mean, for example, Louboutin

shoes with the red soles, extremely conspicuous, right? And when we asked women, well, why,

they said, it shows that I have power because I can afford these products, I have made the

money myself, and I'm still feminine, and, frankly, I'm still sexy. PAUL SOLMAN: Meanwhile,

unemployment and stagnant wages continue to hammer the middle class and the middle-priced

retailers who have long catered to it. J.C. Penney, new owner of the Liz Claiborne brand,

is a current casualty of mid-income malaise, says stock analyst Anthony Chukumba. ANTHONY

CHUKUMBA, BB&T Capital Markets: The J.C. Penneys of the world, the Kohls of the world, they're

struggling. I mean, in many cases, their sales are really not growing at all and their profit

margins are declining. PAUL SOLMAN: Case in point, Thanksgiving sales began earlier than

ever this year and deep discounts have continued since Thanksgiving. Layaway is back, free

shipping is up, profits down at Wal-Mart, the Gap and Best Buy, to name a few. But,

as at the top, at the bottom, business is really good. At Jack's 99 Cent Store in Midtown

Manhattan, the joint was jumping. Why? WOMAN: The prices, of course. MAN: Because of the

economy and the way things are, you have to try to watch every penny. WOMAN: My hours

have been cut. I own a home and all that, so everything has -- I have to be budgeting

right now. PAUL SOLMAN: Analyst Chukumba, who's been tracking dollar stores for 14 years,

says they're benefiting from what we, among others, have called the hourglass economy.

ANTHONY CHUKUMBA: They're growing their sales. They're growing their profit margins. They're

growing their earnings. And the stocks are reflecting that as well. In addition to their

core low-income customers, you have a lot of sort of middle-income customers who are

trading down to the dollar stores. PAUL SOLMAN: At Dollar General, the largest national chain,

profits were up last quarter by 34 percent -- sales at Family Dollar stores and Dollar

Tree also booming. And Jack's 99 Cent Store was doing a brisk business, too, especially

for a weekday afternoon. ANTHONY CHUKUMBA: Given the time of day and the day of the week,

I'm very surprised by the amount of traffic here. And, as you can tell, it's not people

browsing. These people are shopping. I see a lot of full baskets, a lot of full shopping

carts. And it's not just your person paying with food stamps. PAUL SOLMAN: And dollar

stores are investing to serve the pinched consumer. ANTHONY CHUKUMBA: It's not like

they have just been sitting around counting their money. They have been aggressively opening

stores, renovating stores, improving the store experience, bringing in more national brands.

PAUL SOLMAN: What products are popular in stores like this? ANTHONY CHUKUMBA: They're

definitely focusing a lot more on needs, so your food items, your health and beauty care

items, your household cleaning products, and less on wants. They're catering to what the

customer is buying. PAUL SOLMAN: So, then, as the holiday shopping season enters its

final few days, the retail takeaway seems pretty obvious: Aim low or aim high, but don't

mess with Mr. In-Between. urn:schemas-microsoft-com:office:smarttags Street urn:schemas-microsoft-com:office:smarttags

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place JEFFREY BROWN: As shoppers make their last-minute holiday purchases, much attention

is on just how much consumers will spend this holiday season amid a weak economy Normal

Microsoft Office Word JEFFREY BROWN: As shoppers make their last-minute holiday purchases,

much attention is on just how much consumers will spend this holiday season amid a weak

economy Title Microsoft Office Word Document MSWordDoc Word.Document.8