Phillips’ Aggressive Auctions – Risky or Sound in a Down Market?

On Friday, September 11, 2009, The Wall Street Journal ran a story on Phillips de Pury & Co.’s plans for an aggressive round of contemporary art auctions over the next year and a half (see Kelly Crow’s “Doubling Down on the Art Market”). Although the art market has largely stabilized in the wake of its significant decline amidst the global financial crisis, one might naturally question whether Phillips’ decision to step up sales of notoriously volatile contemporary art represents too much risk in what is still very much a down market.

At Skate’s, we believe that Phillips’ move is generally very sound, as it is based on a number of solid and pragmatic business premises:

  1. It attempts to smoothen what is otherwise a highly seasonal cash flow. In the traditional auction house business model, the high seasons occur in the spring and fall, which are interrupted by the winter and summer months that generally see negative cash flow. Difficulties in predicting the success of the high auction seasons can lead to significant losses for the entire year. Having many smaller auctions spread more evenly throughout the year could work well toward creating a more stable cash flow for the firm.
  2. Dealing with contemporary art carries less overall risk, as vetting for authenticity and trade restriction is easier and requires less cost-intensive expert research. Furthermore, securing concessions is easier thanks to a broader supply of artworks, which means that there are no pitfalls of guarantees and advances. Finally, the role of marketing is stronger when it comes to influencing price ranges, as less well-known art is marketed to a less opinionated or knowledgeable public that is more susceptible to the influence of auctioneers. This segment of the art market is growing, largely thanks to a broader universe of art lovers — just look at the attendance numbers at art fairs! Furthermore, this segment is not sufficiently served by the large, established auction houses, which means that this is a very good opportunity for Phillips.
  3. The strategy of finding the right market segment and focusing on it has worked very well in recent years for a number of firms. Significant volume has been built through focus on high growth fields, some examples of which include Bloomsbury for rare books; Heritage Auction Galleries for coins, sports memorabilia and American art; MacDougall’s for Russian art, and so forth. Contemporary art offers a rewarding new segment, and Phillips’ way of approaching it as a “portfolio of themes” provides a solid opportunity to groom the best sub-segments and develop them into profitable business units going forward.

We believe there are two key marketing aspects to watch for with Phillip’s new auction strategy:

  1. Phillips must commit a significant marketing budget to support its strategy and generate considerable interest in each of its auctions in order to avoid disappointing sellers. Disappointment would result through a failure to see improvements in price discovery at auctions (in comparison to what private sales offer) or, even worse, seeing artworks go unsold, thus further tarnishing their marketability. A powerful marketing strategy is also necessary from the point of view of supporting prices for contemporary art.
  2. Coordinating its market strategy with influential contemporary art dealers is crucial for Phillips. A broad supply is a big risk factor, and by drumming up the names of contemporary artists that have a significant free float (i.e., a large number of artworks in private hands) Phillips could very well provoke a supply spike in the run-up to its auctions. The resulting increase in private or non-auction sales could result in under-pricing artworks by the same artist once an actual auction takes place.

Should Phillips overdo it on this new strategy, the art market could notice very quickly that the auction house’s brand name is being used as a vehicle to push artists with little name recognition – artists who would otherwise be unlikely to make it into a major auction house catalogue. This would in turn raise the issue of resale value for items purchased at Phillips. One upcoming example to watch is an auction on September 26, which will feature five Ukrainian artists, two of whom have no auction price records to speak of.

Click here for the original story on Skate’s website

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One Response to Phillips’ Aggressive Auctions – Risky or Sound in a Down Market?

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