Fine Art Auctions - Industry

Fine Art Auctions - Industry

Parent

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.

Art Auction Volatility and Seasonality
  • 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
    • The guarantor agreed to purchase the item at a certain price
    • The price is set below what the auction house thinks it can sell for
    • The guarantor will also collect a fees for the agreement
  • Guarantors can be private investors, galleries, and/or museums

Art Auction Lending
  • 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