The risks for auction houses doing business at the top end of the art market look set to outweigh the rewards this year as the fierce competition for record-breaking works vies with wider economic uncertainty. Higher-volume, lower-priced business in the middle market could be the saleroom mantra for 2016.
Christie’s and Sotheby’s, which have been responsible for some nine-figure public sales and hefty guarantees to consignors in recent years, are now channelling resources lower down the scale. Christie’s, in particular, is primed to attract “the broadest level of interest”, says Jussi Pylkkänen, its global president. He says that the auction house’s strategy this year is to reinvigorate sales in its “core market”, referring to works priced between $100,000 and $2m. Getting a higher percentage of sales through is a priority, “which may mean slightly more cautious estimates”, he says.
Tad Smith, the chief executive of Sotheby’s, also highlights the middle market—which he defines as being between $25,000 and $1m—as an area of focus for 2016. The firm has previously seemed to steer away from these price points; in 2007, it closed its lower-value saleroom in Olympia, west London.
More reliable revenue streams Christie’s and Sotheby’s remain committed to the market’s top end, which Pylkkänen says would be “wrong to write off”, but it is easy to see why they will now be looking for higher-volume, more reliable revenue streams lower down.
For a start, the outlook for the dizzy heights of the art market is not so rosy. This year began with dismal economic news from China compounded by oil prices falling to less than $30 a barrel. Stock markets globally are tumbling and could easily fall further. In January, Larry Fink, the chief executive of the hedge fund Blackrock, told CNBC: “I actually believe there’s not enough [economic] blood in the streets.”
Against this backdrop, confidence levels in the $1m-plus art market have fallen, according to Anders Petterson, who runs ArtTactic, a specialist research firm. In his annual survey of confidence in the contemporary art market, which polled 123 art market professionals in January, 46% of respondents said they believed that its top segment will grow in 2016. Last year’s figure was 76%. In 2015, 5% of ArtTactic’s respondents thought that this area of the market could fall; this figure has risen to 21% for 2016.
Uneconomic sweeteners Works at the top end are costly to source and sell, with uneconomic sweeteners such as guarantees and heavy marketing costs being part of the “golden-lot” parcel for a small, and increasingly demanding, pool of clients. Intense competition between the two major auction houses eats into their profits—tinkering with the evening auction schedule seems to be the latest game—but beating each other at any cost is not a viable long-term strategy. The stakes are high: witness the $50m cash paid by Sotheby’s for an art advisory business in January, to gain quicker access to a powerful list of buyers.
Posting a nine-figure price does not necessarily mean that the auction house itself has made more sales, either. At Sotheby’s, the sales total for 2015 ($6bn) was the same as for the previous year. Public auction sales at Christie's were also flat for 2015 ($6.5bn, down 4% in dollar terms and up 2% in pounds sterling).
“Selling a $60m, guaranteed Picasso inevitably saps a huge amount of energy,” says Ed Dolman, Phillips’ chief executive. At Phillips, which focuses on fewer categories around the middle market’s price points, sales were up 34% in 2015, to $523m. Its average lot value was $107,000, which Dolman describes as “a very sweet spot to be in”.
Tapping into mass affluence At the same time, selling works lower down the scale has become more efficient, thanks to the automated solutions that technology can offer. Osman Khan, the co-founder of Paddle8, an online-only auctioneer, makes a distinction between the “high-touch/low-volume” top end of the art market and today’s alternative business model; his firm’s target price area is between $1,000 and $100,000. Paddle8’s revenues for 2015 were up 100%, he says.
Demand for art, it seems, is also on the rise. According to the Capgemini/RBC Wealth Management World Wealth Report 2015, the number of people with assets of more than $1m (known as the mass affluent) has grown by around 8% a year since 2009 and is forecast to grow at similar levels until 2017. But potential collectors in this group may find the “price of the entry ticket inaccessible” at the top end, says Petterson, so they are instead “starting to search for value in the lower and middle price segments”.
The effect is already evident in the London salerooms this season. Both Christie’s and Sotheby’s are holding dedicated sales of Picasso’s ceramics (5 February). Volumes are high and prices can start below $10,000—and rarely reach six figures. These dedicated auctions have repeatedly been 100% sold, with considerable demand online.
One challenge for Sotheby’s and Christie’s as they step on to their online rivals’ turf is that the latter charge lower commissions. Paddle8 applies a 15% premium to its hammer price, while Christie’s charges 20% between $100,000 and $2m and 25% up to $100,000. Sotheby’s charges 25% up to $200,000 and 20% between $200,000 and $3m. Pylkkännen says that lowering its premium to encourage volume is “not something we’ve considered”.