Sotheby’s results for the first half of the 2012 show an important trend that the auction house must address. Traditional auction sales can no longer comprehensively sustain the business due to high volatility, which is leading Sotheby’s to concentrate even more strongly on other services such as private treaty sales, financial services and exhibition activity.
While Sotheby’s logically attributed the last quarter’s decline to the seasonality factor and fluctuations in supply and demand, the latest disclosure reflects disturbing conditions within the company that must be addressed. Sales are down by 16%, falling to USD 409 mln. Affected income has dropped even more with a decline of 45%, leaving the company’s net profit at USD 75 mln. Commission sales are also down due to growing competition for high value consignments. According to Oliver Chen, a Citigroup research analyst, commission margins remain a significant pressure point, showing a decline to 15.3% from 16.4% during the same period last year and compared to 18.1% in the first quarter of this year.
Sotheby’s offers two reasons in its explanation of the situation: 1) the slowdown in Chinese buying activity and 2) a smaller number of single-owner sales in China, North America and Europe. The year 2011 turned out to be one of the best performing periods in Sotheby’s history in terms of single-owner sales, leaving 2012 in a highly unfavorable position when it comes to making comparisons. Even though Sotheby’s remains optimistic and expresses confidence in the high-end market, it also feels the need to protect itself from ongoing volatility associated with the auction business. Thus, the leading auction house has announced a plan to focus on segments that have shown strong growth over the past several years: lending services and private sales.
In the first six months of 2012, Sotheby’s financial segment showed the highest revenue among all the company’s segments, increasing by 34% to reach USD 8.2 mln. According to the company’s president & CEO, Bill Ruprecht, investors are turning to the liquid side of art, having exhausted the potential of other assets. Sotheby’s continues to benefit from this trend, remaining one of the few players in the art-lending business. Private sales also remained robust, growing by 19% in comparison with the same period last year.
Despite the slowdown in Asian activity, Sotheby’s still claims that the Chinese segment is one of the key areas for the next six months. In fall 2012, the company plans to present unique pieces by Giuseppe Castiglione for Hong Kong sales as well as host an exhibition of works by graduates of China’s premier arts academy at the School of Design of CAFA. Makers of luxury brands have recently published disclosures confirming growth in Asia, and Sotheby’s hopes to maintain similarly strong performance. In some cases, such as that of Prada Group, which just announced exceptional revenue growth in Asia that contributed to approximately 60% of its total sales, in general, luxury brands such as LVMH and Richemont are concerned with an overall slowdown in performance. Although Mr. Ruprecht prefers not to define Sotheby’s as a luxury brand, he nevertheless admits that the auction house still needs to engage with the same group of wealthy clientele.
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