Sotheby’s and Christie’s return to Guaranteeing artprices

The world’s largest auction houses are back in the business of guaranteeing prices on works that they sell, one of their most speculative practices,.the New York Times reports.

Sotheby’s and Christie’s all but gave up guarantees in late 2008, after the effects of the financial crisis spilled into the art market. Sotheby’s lost about $52 million in just one season when works did not sell at the price it had guaranteed to the seller, and it had to make up the difference.


“We are out of the guarantee business at least for a while,” the chief executive of Sotheby’s, William F. Ruprecht, declared at the time.


But last fall, Sotheby’s pledged to cover minimum prices on works that made up 43 percent of the $422 million in revenue at its November Impressionist and Modern art sale, typically one of its highest-grossing auctions of the year. Christie’s has moved in the same direction. At its postwar and contemporary art sale in November, it directly guaranteed 23 lots that accounted for 44 percent of the sale’s $853 million in revenue.


To entice owners to sell a work of art, auction houses sometimes offer them a guaranteed minimum price. If the work sells for more, the house and the seller split the extra amount. If it sells for less, the house makes up the difference. Because it is risky to guarantee prices, the houses may have outside financiers underwrite the guarantees. The outsiders then stand to enjoy any gain.


That auction house guarantees have come roaring back, despite the risks, is a reflection of the largely hidden turmoil in the art market, according to some analysts. Despite the headlines about soaring prices, the analysts say profit margins for the auction houses on big-ticket lots are razor-thin, creating financial pressure that they suggest may have helped prompt Mr. Ruprecht of Sotheby’s, and Steven P. Murphy, his counterpart at Christie’s, to announce recently that they were stepping down.
“It is a brutal business,” said David Kusin of Kusin & Company, a research firm that specializes in the economics of the art market.


Guarantees, in which the house pledges to the seller that it will cover a minimum price, are surging because they are potentially quite profitable and can replace some of the revenue lost because of thinner margins on sales. If bidding surpasses the guarantee, the house typically splits the extra money, often millions of dollars, with the seller.


Margins are thin because competition is squeezing the traditional way auction houses make money: charging sellers and buyers big commissions. To secure the most valuable works for sale in the highest-priced markets — contemporary art, and Modern and Impressionist art — the houses have been surrendering much of their commission revenue to sellers as an inducement to do business with them, not their rivals.


“They are trying to fix eroding margins by getting more of the upside from the guarantee,” said Michael Plummer, a partner at Artvest, an art advisory firm in New York. “It is the one way to eke out profitability when your margins are getting squeezed.”


There is little data to determine the success of the houses’ big-risk, big-reward strategy. Neither Christie’s nor Sotheby’s specifies the prices it guarantees, only the final prices for the works on which a minimum was pledged.


When an auction house guarantees a sale price, it is basically wagering on the ability of its experts to predict the market. In September 2007, for example, Sotheby’s committed to guarantees worth hundreds of millions of dollars, likely turning a good profit during a period of exuberant buying. But two years later, Sotheby’s was guaranteeing almost nothing because of the losses it had suffered.


Christie’s also acknowledged losing millions of dollars at that time on guarantees and said it was returning to a more “traditional business.” Christie’s, which is a private company and not obliged to release its finances, declined to comment for this article.