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High-level exits herald change at big two houses
2015.01.09. | Auction news Forward email | Print
Focus on business models of Sotheby’s and Christie’s as chief executives go


The news that the heads of Sotheby’s and Christie’s are to leave their posts—announced separately but within weeks of each other—has raised the thorny issue of the viability of these major auction houses’ business models in the 21st century.

While Bill Ruprecht and Steven Murphy had different reasons for standing down as chief executives of Sotheby’s and Christie’s, market insiders say that if all had been going swimmingly, they would still be in their jobs.

It’s the economics

Jim Chanos, who heads the New York hedge fund Kynikos and has been publicly shorting (betting against) Sotheby’s shares since early 2014, reiterated his negative opinion at an investment forum in London in November. Last month he told reporters at Bloomberg that his view had not changed, despite the shake-up at the top: “It’s the economics of the business.”

The issue is not so much profits, which both auction houses make (as Christie’s is a privately owned company, this cannot be independently verified), but profitability—the percentage earned from their visibly high-value sales.

At Sotheby’s, auction commission margins (total commissions revenue as a percentage of total sales without premium) have fallen from 16.5% in 2011 to 16.3% in 2012, then 15.9% in 2013. The 2014 numbers are not yet out, but for the first half of the year they had fallen again: to 14.9%.

Meanwhile, at Christie’s it seems likely that the $50m Murphy says he spent on upgrading the auction house’s online capabilities (which many believe to be a conservative estimate) will take a while to reap benefits. Christie’s online sales for the first half of 2014 were £8.7m, or 3.2% of its total sales.

Punchy fees

It seems crazy that the auction houses may be struggling while ever larger sums are being spent on art—and when they charge punchy fees at both ends of transactions. Buyers’ commissions go up to 25% at the big two, with discretionary sellers’ fees topping at around 15%. Christie’s recently confirmed an additional 2% fee should a work sell for above its own estimates—an arrangement Sotheby’s also operates, if on a more informal basis.

One problem, says David Schick, a research analyst at the US investment firm Stifel, is that most of the heat has been at the top end of the contemporary and Modern art markets, where the opportunities are “thin” compared with the broader $100,000 to $500,000 range. At this top end, the commissions are lower—buyers pay 12% over $2m and sellers’ fees are often waived.

“Both houses are after headline prices, which limits profitability,” Schick says, attributing this to “a number of soft years” since the 2008 downturn. Plus, the auction houses have been offering incentives such as guarantees and profit shares to prime sellers.

“They’ve made it harder by competing against each other … you hear about some suicidal deals,” says Pilar Ordovas, a London dealer, formerly the deputy chairman of Christie’s Europe’s post-war and contemporary art department.

Auction houses also need a lot of wriggle room, given how unpredictable their sales and external influences can be. Sotheby’s spent $20.1m defending itself against the criticism of its investor Dan Loeb—now a member of its board—in the first nine months of 2014, nearly half of its net profit for the period.

Time to shrink?

“Their business models need adjusting—they need to shrink their cost base,” says Edward Dolman, who last year bucked the trend by joining an auction house, Phillips, as its chief executive (he was at Christie’s for 27 years, latterly as chief executive before Murphy). Dolman believes that the “massive change in taste” towards contemporary and Modern art should lead to certain departments going—he cites furniture and even Old Masters. “They could shed half of their business,” he says.

While it suits Dolman’s strategy to say this, some of the numbers support him: Phillips has a staff of 200, while Sotheby’s has around 1,600; Christie’s around 2,200. Phillips’ more nimble cost base means that “we don’t need much… It would take an extra $200m of revenues next year to be much more profitable,” Dolman says.

An alternative is to avoid throwing all resources at the top and seek the broader market, a model that Bonhams, which has 60 departments, says has been the secret of its success. Chairman Robert Brooks says that profits at Bonhams—another private business— were more than £30m for 2013.

Schick believes that Sotheby’s, at least, may not need to change radically: “Sotheby’s has yet to broaden its luxury brand—there are opportunities.” Ordovas says that the expected reorganisation at both companies “gives a chance to redirect things”.

Meanwhile, competition is hotting up. Online auctioneers, such as Paddle8, charge lower commissions (their top buyers’ premium is 15%), as do China’s fast-growing auction houses (Guardian’s top fee is also 15%). More traditional auction houses can also be expected to seize on disruption at the big two to lure staff and win business. “[Sotheby’s and Christie’s] have fought a battle between themselves to maintain a duopoly,” Dolman says. “Now is the time for some of the inefficiencies to come out.”

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