2/01/2016

Sotheby's and Christie's


The Economist recently published an interesting article about the changes happening at Christie's and Sotheby's. It touches on many things we have already seen and posted on, such as flat 2015 sales, concerns about 2016 sales, guarantees, technology, an informed marketplace, finding and the cost of acquiring new collectors in emerging markets and competition from other houses.

Overall the information is not new or groundbreaking in any form, but it is a good synopsis of what is going on at the duopoly of Sotheby's and Christie's.

The Economist reports
BETWEEN them Sotheby’s and Christie’s, the Western world’s two largest auction houses, have been in business for 522 years. They display many of the characteristics of old men: a gouty gait that makes them slow to adapt; and a fixation on ancient rivalries that leads them to butt heads repeatedly rather than focus on reviving their businesses for the rapidly changing world around them.

Striving to stay on top is hard work. Christie’s, a private company owned by a French luxury-goods billionaire, Fran├žois Pinault, gives little away. But in a brief overview of its 2015 results, released on January 26th, it admitted that sales were down by 5% compared with 2014, to £4.8 billion ($7.4 billion). “This is a blip,” its deputy chief executive, Stephen Brooks, insists. More worrying was the news that the slump was not just in Old Master paintings, in which buyers have for some time been losing interest. Sales also slipped in the areas that have been the engines of recent growth: watches, wine, even post-war and contemporary art, which has captured the imagination of the global new rich but which fell by 14% in sterling terms and 20% in dollars.

Four days earlier, Sotheby’s new chief executive, Tad Smith, told analysts in New York that its sales were flat compared with 2014’s, that the firm would post fourth-quarter losses of up to $19m and that it was scrapping its dividend. Sotheby’s shares have fallen by more than half in the past six months.

In part the weakness of the big two’s sales is because of the world’s wealthy, Russians especially, drawing in their horns. But in part it is because their business model is looking outdated, leaving them vulnerable to sprightlier rivals.

Although Christie’s clocked up more auction sales than Sotheby’s, $6.5 billion against $6 billion (the rest comes from private sales they broker), the two firms have broadly similar overheads. Each employs between 1,600 and 2,000 people. Between them they hold nearly 750 auctions a year in more than 80 categories—some significantly less profitable than others. Together they run more than 140 offices in 40 countries, and have 22 salerooms.

Under pressure from activist shareholders who want to see a better return on capital, Sotheby’s has made a high-profile (if costly) effort to reduce its head count by 5% over the past few months. Christie’s, too, has been quietly shedding staff for over a year. But neither feels it can afford to cut back too far for fear of weakening itself compared with the other.

Expensive promises
The high cost of protecting this duopoly is most visible in guarantees that the auction houses make to sellers about the price they can expect if they sell their treasures. In deciding where to consign their works, rich collectors play off one auction house against the other to force up the guarantee. Often they also demand a slice of the buyer’s premium (the fee charged to buyers on top of the hammer price) and a reduction in the commission that sellers have to pay, thereby cutting the auctioneer’s margin.

Sotheby’s has had its manicured fingers burned by a generous guarantee it gave to the heirs of its late chairman, Alfred Taubman, on the sale of his collection. Christie’s says it pushed up its offer to the Taubman family to well over $400m. So as not to lose face, Sotheby’s, which had estimated the collection’s worth at $500m, offered a guarantee of nearly $515m. On the items sold by the end of 2015, Sotheby’s reckons, it was $12m out of pocket including its marketing expenses.

On January 27th it auctioned off a batch of the Taubman collection’s Old Masters, reducing its overall loss to $9m, though 17 of the 67 lots on offer, including Ligozzi’s “The Abduction of the Sabine Women” (pictured), did not sell. More than 200 other works will be sold in the spring.

Sotheby’s is not alone in making foolhardy decisions to win or keep business. Last year Christie’s offered a guarantee of about $45m on a silk-screen by Andy Warhol called “Four Marilyns”, from 1962. The offer caused surprise, as the picture had been knocked down at auction, just two years earlier, at $34m. The deal was complicated. The seller was Kemal Has Cingillioglu, a scion of a prominent Turkish banking family who sits on Christie’s European advisory board. He owed the auction house money for a work by Cy Twombly that he had contracted to buy privately.

The market was less than impressed. The Warhol picture, it judged, was being “flipped”—returned for sale too quickly—and the auction estimate of $40m-60m was viewed as over-optimistic. In the event its hammer price was $32m, resulting in a considerable loss for Christie’s.

This is not the only source of pressure on the auction houses. In the past decade the contemporary-art world has ballooned, with new fairs, biennials and exhibition spaces opening everywhere. According to a recent report by Clare McAndrew, a respected art-market analyst, $33.1 billion-worth of art and antiques were sold at auction in 2014, half of all sales. An increasing amount is being traded in undisclosed private deals arranged by brokers.

Information is power
Time was when the big auction houses had a near-monopoly on information about the art market, which gave them an edge over customers as well as potential rivals. But now buyers, sellers and dealers are much better informed, and the mystique of the auction room has faded. Many collectors regard their contemporary art as an alternative asset class, which has prompted the launch of new businesses offering market data, tax advice and analysis of the investment potential of art.

Sotheby’s and Christie’s have been trying to grab a larger slice of this pie. Earlier this month Sotheby’s paid $85m for Art Agency Partners (AAP), which was set up less than two years ago by a former Christie’s specialist, Amy Cappellazzo, and two other founders. Left out of the deal was a $125m art-investment fund AAP had set up with seven of its clients. (“It was clear we could have raised much, much more,” says one partner, Adam Chinn.)

The fund, now the second-largest in the world, has spent only half of the money it had raised, but has already managed to return an impressive $15m to investors. Such funds, like the burgeoning art-advice business, are a promising area that the big two auction houses have been slow to move into.

The two houses realise there is much that they must do to protect their dominance. They need to consolidate their expansion into growing markets in Asia and elsewhere. They must draw new buyers into the art market by first enticing them to buy watches, wine and other luxuries. They need to improve their online-auction platforms, in the face of rising competition (see article). And they must expand their share of the middle market—lots with a value of up to $2m—where there is no need to offer guarantees or discounts to attract sellers, thus making it more profitable than selling more valuable works. Most important, the auction houses must do more to please buyers, expanding what they call “demand-led curation” by creating more imaginative, well-timed sales, and by collating and digitising the information they hold on sellers, to help buyers find what they want.

If they do not do all this, others will. Phillips, a smaller auction house, may have been founded in 1796 but it has recently showed the ambitions of a startup. Just over 18 months ago its two owners, Leonid Fridlyand and Leonid Strunin, the founders of Mercury Group, a Russian retailer of luxury goods and cars, appointed a former boss of Christie’s, Edward Dolman, to start snapping at the heels of the big two.

Phillips’s elegant new headquarters, with its carefully curated contemporary-art exhibitions, in Berkeley Square in London, mask a lean operation: two offices and a staff of just 225 compared with seven or eight times as many at each of the other two houses. The focus is on getting the new rich hooked on buying, first, watches and then contemporary art; and on finding out what such clients want and providing it.

The strategy is working. From a standing start, Phillips sold $80.3m-worth of watches in 2015. Total auction sales, at $523m (mostly of contemporary art), were 34% higher than in 2014. Mr Dolman expects Phillips to reach $1 billion within three years. Although the bosses of Sotheby’s and Christie’s are telling investors that last year’s weak figures were just a temporary setback, the market is changing fast. The big two need to sharpen up.
Source: The Economist 


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