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Slump in fine jewelry may mean bargains for holiday shoppers

Jewelry store expensive upscale
BJI | Blue Jean Images | Getty Images

As a safe bet for stumped husbands everywhere, fine jewelry sales typically shine over the holidays.

But as retailers grapple with deflation, sluggish tourism spending and shifting consumer preferences toward less expensive pieces, growth may be harder to come by this Christmas.

Major jewelers like Signet and Tiffany are already feeling the heat. Sales at each company's established stores declined 2 percent during the third quarter, contributing to what analysts predict will be a contraction in their full-year revenues.

Analysts expect Tiffany's topline to fare a bit better in the fourth quarter, though the company cautioned that its surprise third-quarter revenue improvement isn't enough to signal a turning point.

Both Signet and Tiffany generate roughly one-third of their annual sales during the holiday quarter.

"One of the things we have detected, in the U.S., is that while Signet and its brands are destinations for many looking for diamonds and other expensive items, they are far less on the radar for those looking for somewhat cheaper items," said Carter Harrison, an analyst at Conlumino research firm. "This is especially [an issue] over the holiday period when gifting becomes more important."

The price of a 1-carat polished diamond fell nearly 3 percent in the year ended October, according to industry expert Rapaport. That drop has contributed to a broader decline in fine jewelry prices, which are also under pressure from lower-cost online competition, and secondhand sellers.

Adding to the category's woes are a slump in sales from foreign tourists, which is largely the result of a strong U.S. dollar. And as shoppers seek out bargains, fine jewelry's dollar growth has failed to keep pace with lower-price costume jewelry.

Whereas Euromonitor predicts costume jewelry sales will grow 3.3 percent on a dollar basis this year, to $10.5 billion, fine jewelry is expected to rise 2.4 percent, to $51.4 billion. Volume growth for fine jewelry is expected to pick up this year, after posting a decline last year.

Currency fluctuations have also taken a bite out of fine jewelry's sales. A stronger U.S. dollar has been particularly hard on Tiffany, whose store fleet has been hit by weak trends in Europe, Hong Kong and the U.S. The blue-box brand cautioned investors that the police presence near its New York flagship, which sits next to Trump Tower, has hurt traffic and sales in that Fifth Avenue location.

While it did not lower its full-year sales forecast, management said it "cannot provide any assurance that sales in that store," which accounts for less than 10 percent of the company's total revenue, "will not be negatively affected by this activity in the fourth quarter or in any future period."

While many on Wall Street view those types of challenges as transitory, some have expressed concern that the critical millennial shopper does not have an interest in fine jewelry. Instead of investing in a classic piece they can wear every day, some argue, they prefer to scoop up a larger quantity of costume pieces. That way, they can easily — and cost-effectively — update their wardrobes.

Diamonds and other fine jewelry pieces are likewise seen as a casualty to millennials' preference for spending on experiences. But Jean-Marc Lieberherr, CEO of the year-old Diamond Producers Association, says conversations about millennials' disinterest in diamonds are misguided.

He cited a recent report by De Beers Diamond Jewellery, which found that millennials account for a larger share of diamond jewelry sales (41 percent) than they do of the U.S. population (27 percent). His organization, made up of the world's seven leading diamond companies, has created a new marketing campaign to spur millennials' interest in the category.

Keying in on the generation's desire to stand out, the message is centered around the idea that "Real is Rare. Real is a Diamond."

"The fact that diamonds are from the earth ... is really something that appeals to millennials very strongly," Lieberherr told CNBC. "The more they live in this [virtual, disposable] world, the more they crave things that are authentic."

Like Lieberherr, Signet CEO Mark Light does not sound concerned about a prolonged lull in fine jewelry.

"The jewelry industry has been a growth industry for the past 25 years," he told investors last month. "Through that 25 years, there are some up quarters and some down quarters, but it's been a very consistent performer."

"We believe once the jewelry market comes back to normalcy, which it will, [then] we will continue to gain market share like we have in the past," he said.