Fine Art Auctions - Industry
The global fine art auction drives the entire art auction market. With people queuing up at auction houses as early as the 17th century, the auction industry has come a long way as modern-day people reaping the benefits of digital pleasures, as several galleries are hosting online art auctions. Art depicts unique thoughts, perceptions, and out-of-the box portrayals beyond our imagination that consumers are left awestruck and tempted to buy. The best estimates put annual art sales at between 60 and 70 billion dollars a year, with art auctions generating 20% of annual sales.
- The art auction industry tends to be seasonal (busy in the 2nd and fourth quarters)
- The art auction industry can be volatile
- Art prices themselves can vary widely with the global economy and economic confidence
- The sale of a very expensive piece of art can significantly impact the business
- Auction houses are dependent finding sellers to sell their items - it is a purely secondary market
- When sellers decide to sell is outside of the auction houses control
Art Auction Duopoly
- Christie's and Southeby's make up a well-known duopoly in the business
- However, this duopoly is fiercely competitive - the companies must cave on terms and pricing to win big deals from the other
Art Auction Mechanics
- The buyer typically pays the commission (called the premium)
- The premium is a % of the price and drops as the sales prince creases
- Can range from ~25% to 10%
Art Auction Risks
- Sometimes sellers require a minimum price guarantee (reserve minimum) and this price is not hit
- Buyers may default on their purchase payments
Art Auction Guarantors
- Auction houses can work with third-party guarantors who will guarantee a purchase price
- The guarantor basically sells a put option
- Guarantors can be private investors, galleries, and/or museums
- Auction houses also make money lending to buyers
- Rising rates can decrease demand in this sub-business, impacting overall revenue and profitability
Impact of 2017 Tax Cuts
- The Tax Cuts and Jobs Act of 2017 disallowed 1031 exchanges for art
- This may reduce the demand for art auctions, as investors are less inclined to sell