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A few weeks ago, Christie’s released its numbers for 2017 behaving a little more like a public company than the private it firm that it is. Much is made in the coverage of the auction market about Christie’s having an advantage in not having to report profit and loss as well as other strategic and economic information because it is privately owned. That may be so.

But by putting a robust public relations effort behind the release of its 2017 trading figures and making CEO Guillaume Cerutti available to the Financial Times, New York Times, Wall Street Journal and other outlets, Christie’s is tacitly demonstrating that it craves some of the visibility its public rival gets from its periodic run of the financial and media gauntlet.

By now you surely have heard that Christie’s had a banner year in 2017 when the auction market came roaring back to its previous highs, including a record setting auction price that more than doubled the previous record for any auction lot. In this post, we’re going to recap some of the coverage of Christie’s results, delve into some of the reported numbers and, finally, make a case for what we believe to be the outlines of a new strategy for the auction and luxury markets being assembled at Christie’s.

A good place to start is this summary from the Wall Street Journal’s Kelly Crow who put the £5.1bn results, which were up 26% from the previous year, in context with Christie’s peers:

Christie’s total included $5.9 billion in auction sales, up a third from a year ago. Yet its privately brokered sales dropped 35%, to $612 million—a possible sign that sellers funneled more of their goods into public auctions rather than discreet selloffs. Overall, Christie’s also achieved higher auction totals in the fall than the spring.

Its rival Sotheby’s , based in New York, auctioned $4.7 billion last year, up 13% from the year before. Sotheby’s is expected to release its consolidated sale totals later this month. Boutique house Phillips said it auctioned $625.4 million in art last year, up a quarter from 2016; it privately sold an additional $83.5 million of art.

Christie’s press release pushed one of the auction house’s favorite metrics, market share. For all of the fixation on the Contemporary art market in recent years, the 2017 numbers were bolstered by a powerful surge in sales in the non-Contemporary categories:

Overall, Christie’s sales were up across most key categories, with the house selling $1.6 billion in contemporary art, up 20% from a year earlier. Its sales of impressionist and modern art—a category it now lumps in with modern British, American and Latin-American art—grew 53% to $1.6 billion. Asian art sales grew 44% to $912.4 million.

Here is not a bad place to discuss one of the background themes to 2017’s surge in auction sales. Cerutti has observed that their people see steady demand for art across 2016 and 2017. The limiting factor was supply, especially in the fraught political climate of 2016, being withheld from the market. Or, more accurately, Christie’s sees strong demand from Asia for European works of art but European and American sellers have been caught in the uncertainty of how Trump and Brexit would effect the macroeconomic situation.

Extrapolating from what Cerutti is saying, the implication seems to be that the biggest problem for an owner of valuable art is not whether to sell but having a good idea of how to use the cash that comes from a sale. If the macroeconomic situation is uncertain, sellers are better off staying “long” their art than trading it for cash that they don’t know where to put or put to work.

The broad, global market melt-up in equities may have contributed significantly to sellers willingness to let go of their works. With Christie’s still seeing strong demand, the real issues became how to structure a transaction. Since the credit crisis, the auction houses have amped up their private sales departments which are in some respects in competition with the auction room. Add an increasing use of third party guarantees which are effectively private sales that offer an option to the public and one can imagine that the rise in auction totals would come at the expense of private sales.

Georgina Adam’s sitdown with Cerutti addressed this substantial fall in the firm’s private sales:

However private sales fell by 32 per cent to £472.4m, a drop no doubt partly because of the €160m paid in 2016 for two Rembrandt paintings — the 1634 “Portrait of Marten Soolmans” and “Portrait of Oopjen Coppit”. As a privately held company, Christie’s does not release profit figures.

Adam may surmise that the Rembrandts account for the differential results but there was a bit more going on the background that the sale of the portraits might have papered over in 2016, including a controversial change in the commission structure imposed by Cerutti’s predecessors that sharply curtailed private sale activities and the loss of some of Christie’s long-standing dealmakers with the deepest contacts that are often the most valuable for making private sales.

Adam got more out of the CEO:

As for falling private sales, Cerutti explains: “There was a sharp increase in guarantees and a decrease in supply, plus the departure of some people.” However, he says: “The second half of the year was much stronger, and we are monitoring the situation.”

 

Results at Christie’s may be strong but that hasn’t impressed Scott Reyburn who had a skeptical take on Christie’s and the art market which he thinks trails behind the accumulation of wealth around the world:

Such topline numbers suggest the market is surging. It is worth noting, however, that back in 2014 Christie’s also achieved £5.1 billion of sales, a company high which was then equivalent to $7.7 billion. Since then the global population of billionaires has increased to 2,043 from 1,645, and their total net worth to $7.7 trillion from $6.4 trillion, according to Forbes.

Reyburn mocked the auction houses as still stuck in an 18th century business model which he feels must be holding the firms back from some important transformation:

Last year, auctions generated about 90 percent of sales at both Christie’s and Phillips. How can this market expand significantly when traditional collecting areas are falling out of fashion and when just 25 artists generate almost half of all auction sales of contemporary art?

Whether art should be sold “online” seems to be more of an open question than journalists like Reyburn would like to believe. The assumption that all markets are or will be transformed by online marketplaces is a fairly naive one. But far more important is the fact that Cerutti seems to have hinted at something far more important in his conversation with Reyburn:

“We realized the primary advantage of online is not the revenue generated, but the clients we attract through digital,” said Mr. Cerutti, the chief executive.

With that we get the beginning of a different paradigm for what online sales might mean to a company like Christie’s. To that we can add two data points from Kelly Crow that point to an emerging strategy at Christie’s. Luxury goods and online sales are all of a piece for Christie’s but not, perhaps, in the reflexive way that someone like Reyburn would like to see where Christie’s expands into luxury sales online by ramping up value. Here’s what Crow reported:

Not everything soared: Sales of Christie’s luxury goods such as jewelry, watches and wine fell 9% to $686.3 million.

Christie’s racked up $214.5 million in sales of art online, down slightly from the year before. Sotheby’s sold $180 million of art online.

The last piece of the puzzle comes in the curious rise in overall sell-through rates for Christie’s. Barron’s thinks the rise in sell-through rates from 78% in 2016 to 81% in 2017 is a function of the auction house using guarantees. But that mistakes what this statistic measures. The sell-through rate is measured by lots, not value. The vast majority of lots by volume are lower value. Guarantees are not practical nor cost effective on that end of the market.

To raise the sell-through rates on lots, Christie’s made a concerted effort to reduce the number of lots. That’s what closing South Kensington ended up being all about. Closing that facility allows Christie’s to change the mix of what it sells to put, as Cerutti says, an “emphasis on getting the right estimates and choosing the right lots to sell.”

South Kensington sold the kinds of brown furniture, antiques, decorative objects and estate material that really is what the 18th century auction business was all about. In closing South Kensington, Cerutti is trying to make a break from that past. More important, Cerutti sees online and luxury buyers are his most powerful form of marketing and client generation because most of their new clients, more than a third, are coming in through online sales of collectibles and luxury items. This is especially true for Chinese clients which are an obvious focal point.

The strategic leap here is that Christie’s is now looking at its business in different way. The old auction business was to put everything up for sale and see what happens. There was little cost or downside to having lots that didn’t sell. But in the new business, the client you don’t already know has to be assured that the items you offer, in the sale room or online, are truly valuable.

“In terms of profitability and credibility,” Cerutti says, “the sell-through rate is very important.” That is what is driving the rising sell-through rates, credibility. And the credibility factor, we surmise, will have its biggest pay off for online sales where the new client has confidence that the object being offered will sell to someone. This has the potential to create far-reaching effects within the auction world.

Art Market Gains Speed  (WSJ)

Christie’s Guillaume Cerutti on a sales boom — and that Leonardo  (Financial Times)

Auction Houses Thrived in 2017, in an 18th-Century Way  (The New York Times)