Dealbook, the New York Times’s market-oriented business news site, has a bit of a namby-pamby opinion piece from its Breaking Views partner that has a stronger headline than conclusion. Under the teasing “Loeb’s Criticism of Sotheby’s Has Some Valid Points” rubric, we mostly get analysis that each house has its own strategy and truth will out over time.
That’s nice enough to hear but hardly what you might call news. Nonetheless, there are two bits from the story worth your time. The first is this recap from Sotheby’s CEO Bill Ruprecht’s presentation to investors in November:
Mr. Ruprecht noted during a conference call in November that works of art worth $5,000 or less represent around 1 percent to 1.5 percent of the company’s total sales volume and around 15 percent to 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 Mr. Loeb’s critique. It just seems to be aimed at reaching more people who are more like the traditional kind of Sotheby’s customer.
The other is this tantalizingly opaque and unprovable statement concerning Christie’s margins:
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 margin on earnings before interest, taxes, depreciation and amortization at Sotheby’s in 2012 was about 30 percent.
Think about these two things together now. Christie’s has to be burning a lot of cash to facilitate all of those small sales. To match Sotheby’s margins, it has to be outperforming on the high end business despite what Peter Brant told the New York Times last week.
Update: Murphy confirmed for Bloomberg’s Scott Reyburn that the sweet spot for commissions is not at the very top of the market. That suggests the operating margins are made up on the increasing private sales. That might account for the convergence because both houses have ramped up their private sales in recent years:
“Our contemporary evening sales are extremely profitable events,” Murphy said. “The highest margin is on works that sell for between 200,000 pounds and 5 million pounds. Though not all the works make us a profit, even a small margin on a top lot can represent a lot of money.”
Loeb’s Criticism of Sotheby’s Has Some Valid Points (Dealbook/NYTimes)