You got the best part of Sotheby’s earnings call by listening closely during the analysts questions.
This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)
Sotheby’s released its third quarter earnings report yesterday. Spanning the slow Summer months of July, August and September, the quarter rarely provides much in the way of directional information about the tone of the art market or the evolution of Sotheby’s strategy. Paradoxically, the absence of data usually allows or, even, requires Sotheby’s management to use their earnings call as a bully pulpit on their business.
Before we survey the color commentary Sotheby’s provided, there were some numbers worth paying attention to. For the first nine months of 2018, sales are up a solid 20% to $4.04bn. Half of that rise came from a 49% updraft in private sales to $675.4m. That puts the division on track towards a nice round $1bn in private sales. That number surely reflects the new-ish private sales division hitting its stride but also a quietly increasing industry trend away from public auction to private transactions.
Digging deeper into Sotheby’s numbers, one can see that auction sales are up in 2018 without relying upon Sotheby’s to empty its storerooms as the firm did in 2017. That means Sotheby’s business improved markedly in 2018 without anyone really noticing. In the third quarter of 2018, Sotheby’s sold $6.5m of property that it already owned. These are works previously guaranteed that didn’t find buyers or inventory acquired in other ways. During the same period in 2017, that figure was more than 12 times that amount or $81m. For the nine months of 2018, inventory sales were $62.8m. The year before that figure was almost three times as high or $172m. Overall revenue was down but without an impact on the profit.
Just looking at the commissions that Sotheby’s earns on sales both public and private, Sotheby’s did much better in 2018 than 2017. For the third quarter, commissions rose 20% from $81m to $96m; for the nine months of 2018, the overall gain was slightly lower at 11% tracking the 2017 total of $494m which rose to 2018’s $553m.
This is good news for Sotheby’s core business: savvy specialists finding art that can sell and the buyers to bid on it. That core function can easily get obscured these days. Sotheby’s two main competitors, because they are privately owned, are free to focus solely on that core business. But because Sotheby’s was the subject of an activist investor campaign five years ago that resulted in the installation of CEO Tad Smith three and half years ago with a mandate to transform the company, Sotheby’s has to serve a different master.
When you strip away the positioning, there’s a simple calculation at work here. Smith has been tasked with “creating a way for the company not to be trapped by its historic valuation.” In plain English, Smith is saying his task is to figure out a way to break Sotheby’s stock (BID) out of its trading range over the last dozen years which—excepting some times of stress—has generally been between a $40 floor and a $60 ceiling.
When asked about the implementation of Sotheby’s investment in technology, Smith alluded to two options for growth. One is high-touch; the other is low-touch. Sotheby’s, Christie’s and Phillips do the former. Sotheby’s also wants to do the latter.
Sotheby’s, indeed, all art selling, is a high touch business. It takes a great deal of time invested by very knowledgeable and talented persons to convince someone to sell or buy a six, seven, eight or, especially, nine-figure work of art. The big numbers get the big press but they require a physical infrastructure—offices, sale rooms, travel budgets, exhibitions around the globe, art fair dinners, general white glove service to clients, not to mention providing guarantees and backing them up with irrevocable bids—that is costly, time consuming and forces the firm to move ever toward the higher end of the market. The only avenue left for expansion would be to leverage Sotheby’s brand as other luxury brands do. Smith waved at that in his comments but he doesn’t want to go there.
What Smith wants to do is something harder. He wants to find a way to leverage Sotheby’s brand and global footprint to evolve into a low-touch business (or maybe just a lower-touch business) with greater reach. That’s what has been behind many of Sotheby’s recent moves. The purchase of Viyet, now doing business as Sotheby’s Home, is the first step in figuring out what low-touch selling can be like in this space. Here’s what Smith said contrasting his vision against the high-touch model.
“We already sell things that are affordable to orders of magnitude of people who are not buying them. So why are they not buying them? We haven’t made it easy enough. What we’re trying to do with technology is make it so easy to transact with us that we will reach a bigger audience by two orders of magnitude.”
For those of you who didn’t go to business school, Smith is saying he wants to expand his customer base 100 times. A hundred times the customers won’t bring in 100 times the revenue but if Smith can find a way to harness low-touch buyers and sellers, he can significantly add to his business in ways that another $100m painting cannot.
How would they do it? That’s still remains to be seen. The hints here are that tools like Sotheby’s appraisal app that allows consignors to submit objects with greater ease and lower internal cost will allow Sotheby’s to vet the dross from the salable objects. Matching that to Sotheby’s faster information sharing among the high touch side of the business, what Smith calls the “paperless sale room” might begin to provide real direction for the company. Ultimately, Sotheby’s wants to be able to match more buyers and sellers with high quality heterodox material at a lower cost while still meeting a Sotheby’s standard of quality. That’s a big, hairy audacious goal.
