Union Hardware in Bethesda is 97 years old and has blue-collar roots. Founders Abraham and Jennie Goldberg chose the name “Union” because of the growing strength of labor unions at the time. Like many small businesses, over the years the store has lured customers away from big-box competitors with the folksy tagline, “It’s about service.”

But 95 years after its founding, grandson and current co-owner David Goldberg took the store in a decidedly white-collar direction. Reacting to recessionary pressures, Goldberg turned the shop into, essentially, an art gallery of bathrooms.

Prior to 2008, Goldberg’s supply of faucets, cabinet hardware and other standard fixtures were flying off the shelves.

“We were just taking orders,” Goldberg said. “It was wonderful. I thought we would hang in there being in this town, which is supposedly more recession-proof.”

Then, a few months into the recession, the store’s orders fell by half as consumers put home-improvement projects on hold.

“Customers stopped coming through the door and everyone hunkered down,” he said. Goldberg knew service wasn’t enough to get people buying again. “We had to stand out in the crowd and compete with the Internet and with plumbing supply houses. We knew we needed a new story.”

At the end of 2008, Goldberg went to a trade show in Germany and saw the sink that would change his business. As soon as he laid eyes on “Betty Blue” — a water table that resembles a ceramic desk with a faucet sticking out of one end — he knew he had to have it. So he bought it and installed it in his store.

“Then saw the reaction of our customers — they were literally dropping their jaws,” he said. “I knew the word of mouth was going to be effective.”

The water table was what Goldberg called a “red cow,” or a product that makes a store stand out. As more and more customers took interest in Betty Blue, Goldberg began taking more and more trips to European trade shows and buying up contemporary-looking sinks, tubs and showers.

“I needed to shift from commodity items — items that you can find over the Internet or at multiple stores — to something more exclusive. More fashion,” he said.

Inside the store, he gutted displays that were crammed with product and replaced them with a few high-quality wood shelving units. With the remaining room, Goldberg refinished the walls with tile, re-did the floors and brought in striking, high-end “art” pieces.

Now, where there used to be white laminate display shelves, Union has white gold tile with a steam shower built around it. In another corner, a $7,300 black toilet opens automatically and plays a variety of music - from classical to “Yankee Doodle.” Facing the window, a shower embedded with LED lights has a poster of a model dancing in the rain inside it. (“She’s my best sales girl,” Goldberg explained. )

In the center of the store, next to the $800 hemp Italian bathrobes and the specialty hand lotion, stands the original Betty Blue.

As the piece de resistance, this summer Goldberg made a giant replica of Van Gogh’s Starry Night out of old hardware and hung it on the store’s outer wall.

“In my industry, people don’t really have strong visual reactions. When you’re selling toilets, no one cares,” he said. “But making something out of our products and translating it into art fits perfectly for us.”

Growth at the top

Goldberg’s foray into the high-end market may seem counter-intuitive in the sluggish economic climate, but in many ways, he was just following the money. In the midst of warnings that consumers are cost-cutting and coupon-clipping, the retail market has actually split in two: low-end retailers are doing well, but so are extremely high-end ones.

Among its retail predictions for 2011, S&P Equity research said, “We expect continued bifurcation of the retail market with high-end luxury stores benefiting from the wealth effect and low-end stores being aided by value-seeking consumers.”

The first half of the year saw 13 percent sales growth at Saks while mid-market retailers like JC Penney and Gap struggled.

“Full-price selling is at record levels,” Stephen I. Sadove, chairman and chief executive of Saks, said in an interview with the New York Times. “We’re now in a less promotional environment than we were before the recession.”

And it’s not just clothes: high-end products have seen marked success during the recession across all sectors. Well-heeled yogis are still buying outrageously expensive rubber mats, and Tiffany & Co. and De Beers Diamond Jewellers saw double-digit increases in sales in 2010.

Goldberg’s shift to glamorous wares was successful in part because of his location, said Pam Danziger, a luxury retail expert with Unity Marketing. The D.C. area has a high population of well-off home owners, and those looking to make home upgrades may be more likely to seek upscale options, she said. This is especially true given that the poor housing market meant home owners were more likely to upgrade their living quarters than try to sell their houses.

Union’s owners “re-branded their store to make it more of a destination,” Danziger said. “A lot of affluent home owners don’t want to put Lowes and Home Depot products into their homes.”

Danziger said more so than pursuing high-end customers, offering specialty products is key to small retailers’ success. Small shops can’t compete with larger stores on price, so their only option is to provide products that other stores don’t have.

“Small retailers can’t play the same game as big-boxes,” she said. “You need to focus on the “special” part of your store — where Lowes is mass, you turn toward class. That’s how specialty retailers are going to survive in the future.”

A risk worth taking

Other retailers have also begun chasing the upscale market. Restoration Hardware rebranded in 2010 as “an artful expression of home furnishings in a gallery setting.” In 2008, e-commerce site Smart Bargain started Rue La La, an invitation-only aspirational sister site.

Paul Sabbah, president of export management company Stamford International Inc. in Stamford, Conn, said he’s increasingly “encouraging our manufacturing partners to consider adding more upscale items.”

“Generally speaking, if prices are going up, then we want to be selling products which don’t sell on price alone,” Sabbah said. “We need to focus on products which offer significant features and benefits which outweigh simple price considerations.”

However, some analysts say retailers should be cautious about plunging into the luxury goods market. Sucharita Mulpuru, a principal analyst for Forrester Research, said such a move is hard to accomplish successfully.

“It’s pretty unusual to be able to go upscale and still attract a broader market, especially in a downturn,” she said. “If they’ve managed to pull that off, there are probably some very good reasons why,”

Mulpuru said that a few advantages — like a good base of customers, a good location, and attractive visual merchandising — can make it easier to go high-end.

Goldberg has all those factors. His business is old enough that investing in the costly renovation didn’t bankrupt him. The store has always had a reputation for being pricey, so there wasn’t a wave of sticker shock when he brought in items that were more exotic — and more expensive.

But he says the transition wasn’t entirely smooth. European styles are years ahead of American ones, he said, and his sales team wasn’t familiar enough with the new, chic products to be comfortable selling them. He held an event in September to educate designers and decorators about his new products, but he said attendance was poor. (Union has since hired an external sales rep to work directly with designers.)

These days, customers don’t necessarily buy more, but Goldberg said he’s doing better than he was in the early months of the recession and he has no idea what shape he’d be in if he had done nothing. Either way, Goldberg says, the experiment with luxury bathrooms would have been worth it to him.

“I like to learn from everything that fails,” he said. “I’m a spaghetti thrower. Most things don’t work, but every once in a while something sticks.”

E-mail Olga Khazan here. Follow Olga and OnSmallBiz on Twitter.