Tuesday 21 November 2017

Going once ... Sotheby's offers chance to invest in auction houses

 

Sotheby’s, which is the only global auction house to be quoted on the stock market, has moved into the middle market and increased online growth Photo: Getty
Sotheby’s, which is the only global auction house to be quoted on the stock market, has moved into the middle market and increased online growth Photo: Getty

Aidan Donnelly

Picture a room packed with people. Activity has been frenetic. At the top of the room, two men in tan-coloured lab coats stand, holding a painting. In front of them at a podium, a lady holds aloft a gavel. As she scans the room, she asks the questions: "Am I all done? Are there any more bids ladies and gentlemen?"

Welcome to the world of the auction house. While there are many regional players, on a global scale, there are only two auction houses: Sotheby's and Christie's. Even though it is a strong duopoly, it is a highly competitive one with market share ebbing and flowing around 50pc. But only one of these giants is quoted on the stock market: Sotheby's. Given the nature of the business, many have said there is no need for the company to be quoted and the fact that it is owes more to a quirk of history than necessity.

The global art market has been improving in recent years but it's not all about art. In fact Sotheby's auctions items in 70 different categories ranging from jewellery, watches, wines, and even cars. The company has a growing financial services business as well as offering its services as consultants in many of its key areas of expertise. The business tends to be very seasonal with the second and fourth quarters of the calendar year being the very busy ones.

It's not on price (or in this case, the commission charged on transactions) that the two big guns compete. Both companies stress the importance of their expertise and their ability to fill the room with the right type of buyers at auction time. Ultimately, it is a better deal for the seller if he achieves a higher price at the sale rather than a few basis points less in a commission rate.

Sotheby's operates in 80 locations in 40 countries, with its main sales centres being in New York, London, and Hong Kong. It has a huge database of customers and products and the company uses this to data mine and create the best auctions. But the real trick to the business is not finding customers; it is more about finding attractive items for sale.

To grow its business, Sotheby's has identified several strategies that range from moving more into the middle market and expanding the addressable market. As the type of items being sold changes, so too does the type of buyers that are interested. (Not everything sold is a multimillion Van Gogh). It is also increasing the amount of private sales that it carries out, where a piece of art is sold without ever going to an auction.

Possibly the biggest area of growth has come from online. The volume of online transactions is exploding with $155m spent at Sotheby's online in 2016. This accounted for 19pc of all lots sold, but more interestingly, over half of all new bidders came from the online channel. This year has seen further growth in transactions and last May, online buyers paid $2.7m for a Joan Mitchell painting and $1.2m for a Harry Winston diamond ring.

The financial service offering has also been growing in importance. With the company's expertise in assessing the value of a customer's collection, it can extend a loan to the customer, using the collection as collateral. These loans typically have a low loan-to-value ratio and bad debts tend to be very small.

Whilst the sound of the hammer coming down in the auction room may not be unique, being able to invest in the company running the auction certainly is.

 

Aidan Donnelly is head of equities in Davy Private Clients. See disclosures at www.davy.ie/AidanDonnelly

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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