Sunday, 23 June 2013

More on auctioneering

Interesting comments emailed by a reader with direct experience of negotiating with auction houses as a dealer and also discussing Sotheby's results with their Investor Relations department. More evidence that if you're selling at auction you should try to negotiate a seller's premium of zero at most, and get a kickback from the buyer's premium if you can:

Sotheby’s doesn’t spell it out in their filings but they actually provide you with some very helpful data.  For 2012 they provided the following figures ($ in mm):
Reported aggregate auction sales:  $4,473.6
Net auction sales: $3,809.7
Auction commission revenues: $622.4
Private sales: $906.5
Private sale commissions: $74.6
The first thing we can see is that commissions on private sales are roughly half (8.2%) that of auction sales.  Part of that is explainable by the higher average sales price on private sales, but given that the minimum buyer’s premium is greater than 12% for an auction sale, private sales still bring a much lower commission.  Of course, there is also less expense involved for the auction house.  The private sale commission rate has ranged from 7.5%-9.0% over the last decade.
The auction numbers are where you can have more fun playing with the numbers.  You rightly point out that the average commission last year was 16.3% (622.4/3809.7), the denominator representing “net auction sales”, aka hammer price.  What about that “reported aggregate auction sales” figure, though?  That number represents the hammer price plus buyer’s premium.  The difference between it and net auction sales represents the aggregate buyer’s premium paid.  That figure is $663.9M, or $41.5M more than the reported auction commission revenues. Why? 
I walked through the math with Sotheby’s investor relations, and got them to admit to me that the aggregate “seller’s premium” is negative.  In other words, Sotheby’s gives back more of the buyer’s premium to big-ticket sellers as a concession to win their consignments than it takes in as seller's premiums from the small fry.  This was always positioned to me as a “revenue opportunity” by the IR division, but the fact is the trend has been getting worse, not better (-0.4% of net auction sales, on average, over the last 5 years, vs. +1.1% over the previous 5 years).
The moral of the story is that seller’s commissions are for suckers.  They’ll always give you a line like “well, we can give you our dealer rate of 4%”, but the fact is I haven’t paid a seller’s commission in two years, and neither should anyone else.
As a final side note, the filings also provide a small window into the dealer world, since they break out the results of Noortman Master Paintings separately.  Excluding inventory writedowns (which have been substantial over the past few years), gross margins have been 25-30%, surprisingly low given the standard dealer practice of asking twice (or more) what they paid for a painting.  On an operating basis, the business is basically breakeven.

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