Complex Made Simple

Despite art boom, auction houses face struggle

For some in the rarefied world of fine art auctions, 2014 was the best of times; for others, less so.

The world’s largest auction house, Christie’s, sold $852.9 million of art in a single evening on November 12. For the fourth time in a row, the company’s biannual Part I sale of postwar and contemporary works in New York had raised the bar for the highest-grossing art auction in history, eclipsing the “mere” $343.6 million taken at its long-term competitor, Sotheby’s, the previous night.

Sotheby’s loss of market share to Christie’s in the all-important sector of contemporary art had been inflaming the ire of Sotheby’s biggest external shareholder, the hedge fund manager Daniel S. Loeb. Last year Loeb wrote an open letter calling for the resignation of the company’s chief executive, William Ruprecht. This year, on Nov. 20, just over a week after that underwhelming New York sale, Sotheby’s announced that by “mutual agreement” Ruprecht would be stepping down.

Then, on Dec. 2, despite the edge it had established over its historic rival, Christie’s stunned the art world by announcing that its own chief executive, Steven P. Murphy, would also be leaving.

The departure of two company heads, staff cuts at Sotheby’s and the imposition of a new 2 per cent “success” fee for sellers at Christie’s in 2014 were all indications that the auction house as a business model was facing challenges, even in the middle of an art boom.

“The auction houses have been giving it away,” said the Dallas-based collector Howard Rachofsky. “The prices are high, which encourages people to sell, and typically they buy something else, so it becomes self-fulfilling.

“Walmart have made billions on small margins, but businesses like that aren’t as corpulently run,” he added, referring to the hefty staff and marketing costs that auction houses now incur when selling top-end contemporary art to a global clientele.

In 2013, Sotheby’s reported a net income of $130m on $6.3bn of auction and private sales – a margin of 2 per cent. Equivalent profit announcements are not disclosed by Chrtistie’s, which only releases sales, but gives no indication of profit or loss.

Amy Cappellazzo, the co-founder of the New York-based Art Agency, Partners, points out that by taking the risk of promising a seller a minimum price, auction houses reap a sizeable share of the upside if the work sells above that figure, and keep most if not all of the buyer’s premium.

“If the houses are going to act as a principal rather than an agent by offering guarantees, then it is fair to be looking for opportunities to put their capital to work and enhance their profits,” said Cappellazzo, a former international chairman of postwar and contemporary art at Christie’s.

Last year, because of cutthroat competition for big-ticket consignments, owners of unguaranteed works estimated at more than $10m were not being charged any seller’s commission and were often being given most of the buyer’s premium, leaving the auction houses a few percent of the final price to defray against hefty marketing costs. Terms may be less generous in 2015.

In 2014, for the second year in a row, Picasso – who had been a market’s dominant name for decades – was not among the 10 most valuable works sold at auction. Insteadm Andy Warhol took that crown, accounting for three of the top prices in 2014.

The international super-rich were setting new auction highs for classic cars ($38.1m for a 1962 Ferrari 250 GTO at Bonhams in California in August), watches (23.2m Swiss francs, or $23.3m, for a Patek Philippe Supercomplication pocket watch at Sotheby’s in Geneva in November) and wine (12.6m Hong Kong dollars, or $1.6m, for a 114-bottle superlot of Romanée-Conti Burgundy at Sotheby’s, Hong Kong, in October).

“We are in a race of ‘showing off’ for a very small number of happy few,” said the Paris-based art collector Steve Rosenblum. “They don’t get a good return from their cash since the interest rates are so low. The art, the luxury cars, the watches, diamonds are a new asset class that they are investing as a diversification in their investment portfolio.”

To be sure, there are some clouds on the horizon.