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Small dealers are squeezed by the auction house giants

Tied to increasing prominence of private sales by auction houses

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The auction houses’ private sales departments are increasingly blurring roles, leaving winners and losers in their wake. In their annual reports this year, Sotheby’s and Christie’s revealed that private sales totalled in excess of $1bn, an eye-popping amount considering they are—or rather were—based on the business of selling art at public auction. Last year, Christie’s private sales activity grew 39% to $572.4m, while Sotheby’s reported $494.5m, with growth of 4.9%.

Both firms say that private sales, which represent around 10% of total turnover, are mainly in the old master, impressionist and modern, and contemporary fields, with jewellery also strong. Christie’s calls private sales “an increasingly important, discreet route to market”.

While salerooms have been blurring the distinction between auctioneering and dealing for some years, the auction houses are increasingly eating into dealers’ territory. As well as owning dealers (Christie’s has Haunch of Venison; Sotheby’s has Noortman), the houses are mirroring their business practices.

For a start, the auction houses are increasingly acting for buyers, rather than just the vendors of works negotiated by private treaty. Alexander Platon, head of private sales in Sotheby’s European impressionist and modern art department, says this represents more than half the transactions he handles. However, around 75% of Christie’s private sales are on behalf of vendors, not buyers, says the company’s international managing director for private sales, Caroline Sayan.

Coupled with a market which now demands immense financial clout, these changes are creating new opportunities for some, but are squeezing others out. The winners are agents, consultants and advisers—a function that hardly existed a generation ago.

“When the auction houses started offering guarantees, irrevocable bids and so on, they lost their position as simple middlemen; clients didn’t know if they had a financial interest in selling one work of art more than another. And that created a gap in the market, a role for independent advisers like ourselves,” says Guy Jennings, a former specialist with both Christie’s and Sotheby’s who is now in partnership with Simon Theobald in London.

“When I started 20 years ago, I was the only agent in town,” agrees London’s Robert Holden, whose clients mainly hold traditional art: he finds the best outlet for their works, either by private treaty or at auction. Business, he says, is “very good”.

So who are the losers? Most under threat are smaller secondary market dealers. They do not have the financial clout to rival the auction houses or the “mega-galleries”—Gagosian, Pace, Hauser & Wirth and Zwirner—with their massive spaces and deep pockets. Jennings says that for a gallery to hold stock of modern art, “even £200m wouldn’t go far.”

The dealers’ traditional ways of doing business—buying at auction, selling at a good mark-up to established clients—is being eroded. Artnet, Artprice and other online data banks mean that the amount the dealer has paid for a work is known to all, preventing a good mark-up.

As for the buyers, there is a massive realignment taking place. Among the biggest hitters in today’s market are many newcomers—from the financial world or emerging economies—who do not have a collecting background. As such, they do not have strong relationships with any dealer, and prefer the auction route which they see as more transparent as well as offering the thrill of competition and providing a “brand name”. The auction houses have successfully wooed these greenhorns with what Platon calls a “bespoke service”.

Partly this means doing things that only dealers used to do, such as restoring works of art before sale. “Today’s buyers aren’t necessarily very sophisticated, and particularly in the modern art field, many like nice, shiny cleaned-up paintings,” says another art agent. Sayan agrees, saying that more clients want “pristine and ready-to-go” works of art—“This is happening in other sectors as well, such as real estate,” she says. “Clients want something immediately.”

Even the way the auction houses are paid is changing. The traditional deal was for the house to take a percentage on private treaties, acting in its role as intermediary. Now the houses sometimes negotiate to keep all the “overage” on the agreed price—exactly as a dealer would. Sayan confirmed that Christie’s sometimes structures deals this way; Platon did not comment.

During the financial turbulence of 2008-09, the pendulum swung a little away from auctions, which according to Clare McAndrew’s 2007-09 Tefaf market report represented about 45% of the art trade by value in 2009, with dealer sales making up the other 55%. Now, McAndrew notes, auction is growing its share of the pie, and in 2010 took a 49% chunk. “It’s no secret that dealers selling in the €20,000-€100,000 range have been suffering,” she says, pointing to the number who have left their shopfront premises to trade from offices and fairs.

Jennings is sanguine. “The landscape has changed,” he says. “It used to be that you were either a dealer or an auctioneer. Things have changed, and we all have to adapt.”

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