Loeb wrestles Sotheby’s over new art paradigm

January 22, 2014

By Richard Beales
Thea author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Dan Loeb is wrestling Sotheby’s over a new art paradigm. The Third Point founder reckons, essentially, that the listed auctioneer should be more like privately held arch-rival Christie’s. The $3.5 billion Sotheby’s, whose stock is up more than 40 percent over the past year, is hardly a basket-case. Its total auction sales increased 19 percent in 2013 to top $5 billion, outgrowing the larger Christie’s. Unusually for an activist investor – typically an analytical breed focused on the here and now – Loeb’s main beef with the company seems to be over the direction and pace of broad art market trends.

Sotheby’s boss Bill Ruprecht has promised to reveal the results of a strategic self-examination soon. Aside from overdone barbs about the chief executive in the letter Loeb sent the company in October, the hedge fund boss raised questions about the performance of Sotheby’s in the contemporary category, in its embrace of the internet, and in its international strategy.

The debate is really over shifts in the market. There was a time when long-established rivals Christie’s and Sotheby’s knew that their well-connected senior people only needed to move in the right circles in London, New York and other Western capitals and they would regularly cross paths with the customers who really mattered – a few big Western collectors and art dealers. No longer.

Location, location, location

In an October presentation, Sotheby’s reported that some 30 percent of its buyers in 2012 came from what it called “new markets” – those outside the United States and Europe – against at most 10 percent of them two decades ago. As the firm noted, that’s still a smaller proportion than the 43 percent or so of Forbes billionaires based outside traditional art markets, suggesting newcomers will only increase in importance.

China was the second-biggest art center in 2012 after the United States and local auction house Poly International ranked as the third-largest in the world, according to the TEFAF Art Market Report 2013, which pegged the global market at 43 billion euros. But Sotheby’s is no slouch in China, despite Loeb’s suggestion to the contrary. Like Christie’s, it now runs sales in the PRC. And its record in Hong Kong is illustrious. Including auctions there, in Beijing and globally, the company’s Asian art sales increased 50 percent in 2013, faster than at Christie’s.

Both auctioneers are pursuing customers in new markets, especially China. Where there’s more of a difference is in how broadly the two firms go about attracting new buyers and sellers.

Elitism vs democratization

Ruprecht noted during a conference call in November that works of art worth $5,000 or less represent somewhere between 1 percent and 1.5 percent of the company’s total sales volume and somewhere between 15 percent and 18 percent of its number of transactions. He contrasted that with what he called “one of our traditional large competitors,” meaning Christie’s, where he said some 51 percent of lots were worth under about $5,000 – and these contributed less than 2 percent of sales.

His conclusion: “We don’t believe that a business that’s contributing 1 percent to 2 percent of your sales and consuming 50 percent of your transactional activity is a smart bet for the future.” Christie’s argues differently, suggesting that bringing in all kinds of customers, perhaps traditionally dealer clients in unrelated areas of art, not only can result in profitable new business but also adds to competition for lots on sale. That pushes up prices, making it easier to attract high-quality consignments the next time.

It’s a substantial difference in philosophy, which also partly explains the two companies’ different web strategies. Sotheby’s does have one, despite Loeb’s critique. It just seems to be aimed at reaching more people who, aside from the medium, are more like the traditional kind of Sotheby’s customer. The Christie’s approach is to throw the net wider, including into the realm of specially designed web-only auctions, to reach everyone from upcoming Chinese entrepreneurs to newly rich Silicon Valley geeks. Christie’s said on Wednesday that 30 percent of buyers in 2013 were new to the firm, accounting for 22 percent of global sales – and on its online platform, nearly half the buyers were newcomers last year.

Bacon and a car crash

The two big global auction houses coincide again when it comes to attracting as many super-rich collectors as possible, from anywhere in the world. The requirements for a blockbuster auction include not only the right works of art but also bidding contests. The Christie’s contemporary sale in New York in November, which totaled a whopping $692 million, included a Francis Bacon triptych that went for a record $142 million. Seven bidders fought for the work, according to the New York Times.

Sotheby’s managed $105 million for a Warhol the same week – with five bidders in the running for a while – but its sale total, $381 million, paled beside its rival’s despite being the biggest ever for the company. That supports Loeb’s claim that Sotheby’s is falling behind in this area, where the current breed of super-rich collector seems to be most interested.

Sotheby’s has parted ways with the longtime head of its contemporary art department since then. But the very priciest lots, like the Bacon and Warhol record-breakers, are usually much less profitable than simply expensive ones, since competition to sell them is so fierce. They boost a firm’s reputation but may not do much for the bottom line.

Are both right?

Sotheby’s and Christie’s both now also have private sale businesses totaling more than $1 billion each in 2013 – essentially acting as dealers for clients who need privacy or want to buy and sell at times when auctions aren’t scheduled. Both have sidelines of various kinds, too, like the retail wine and diamond businesses operated by Sotheby’s.

Christie’s has a slight market share edge; it also matches or surpasses the margin performance seen at Sotheby’s, according to a person familiar with the company’s financials, despite the costs associated with more low-value lots, more employees and more frequent auctions. The EBITDA margin at Sotheby’s in 2012 was about 30 percent.

Fashions can change quickly, and any big dropoff in contemporary art would hit Christie’s harder than Sotheby’s. On the other hand, an accelerated shift toward new buyers and online sales might play out better for Christie’s. Share price performance suggests investors are hardly losing faith in Sotheby’s yet. Still, Ruprecht and his board colleagues may yet thank Loeb boss for his acerbic attention. Better to set a new strategy, if necessary, while the old one is still profitable.

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