Big or small? Is fragmentation in the art market such a bad thing?

Anders Petterson, founder and managing director of analyst ArtTactic, argues the big is not always beautiful in the art market and a wider clientele is best sought throughout the internet

5 min read

Global art market sales reached $56 billion in 2012, up more than 280 per cent in the last ten years, according to the latest TEFAF (The European Fine Art Fair) report. The art trade has become big business to the point where private banks and wealth managers are eager to get their teeth into this market. But how can an unregulated, connoisseur-driven collectibles market ever satisfy an increasingly conservative and risk-averse banking community?

Despite frequently being described as an unregulated, opaque insider’s market, the art world has become infinitely more accessible and transparent in the last decade, mostly thanks to technology. Although regulation remains an issue, a bigger challenge to the professionalisation, capitalisation and growth of art market businesses, is the fragmented nature of the art market. It is often characterised as a cottage industry, with a large number smaller galleries, dealerships, art advisers, legal practices, research, valuation and appraisal services.

Each one of these companies inhabit an important place in the art market eco-system, and have built a strong reputation and trust among its clients, but the “local” and highly specialised knowledge, combined with lack of capital to expand, make it hard to scale any of these companies in any significant way. Therefore, advocates of a more professional and regulated art marketplace are calling for industry consolidation. But how simple is it to implement this in practice?

In the past there have been numerous attempts at merging different art entities to either scale operations or provide access to new markets. When Haunch of Venison, founded by art dealers Harry Blain and Graham Southern, was acquired by Christie’s in 2007, it shocked the art trade, particularly dealers and galleries, which saw this as a clear intrusion on their turf. The acquisition probably made sense at the heady time of the art-market boom, but it quickly proved to be ill-fated, as galleries feverishly defended their territory by excluding Haunch of Venison from many of the major art fairs and thereby deprived it of the most lucrative parts of the commercial market. In the end, the gallery became isolated, burdened by expensive real estate in London and New York as well as high staff costs. The final nail in the coffin came in 2010 when Blain and Southern left, and set up their new gallery space. In March 2013, Haunch closed all its galleries and what was left was incorporated into Christie’s private sales department.

There are at least a couple of lessons to be learnt from this. Firstly, what might seem good business logic could simply fail due to the strong rivalry between different segments of the art market (particularly primary galleries or dealers and auctions). Secondly, the real value of an art business largely sits with the individual(s) who started or run the business and, unless you manage to keep these people on board, your biggest risk is that they will leave, set up a rival operation and take all the clients with them.

Last year’s attempt by Luxembourg-based private-equity firm, Redline Capital Management, at a hostile takeover of artnet.com is another example of how difficult it is to try to consolidate the art industry, even if it would make sense from a shareholders’ value perspective. In this particular case, Redline argued that artnet needed a change in management and direction as the company was “in chronic need of capital”. However, as the approach became increasingly hostile and personal against the founder and then chief executive, Hans Neuendorf, they underestimated his influence in the art market and among fellow shareholders. Neuendorf was quoted in saying: “We do not need investors who are interested in raising their profile and profit instead of [being interested] in art.” Redline aborted its takeover attempt in August 2012, after being defeated in the annual shareholders’ meeting.

What investors and dealmakers outside the art market fail to realise is that consolidation doesn’t make sense for many of the smaller companies in the market. In fact they are small, because they want to be. Many of the owners have no desire to manage large businesses (many of them left large companies for a new and better lifestyle), they want to stay close to the business and their core interest and skills – and they often value this freedom above the prospect of growth and making more money and profit.

So going back to our initial question – how do we consolidate the art industry? – maybe we should actually ask do we need to consolidate to achieve a more professional and better capitalised art market infrastructure? How can we develop such a fragmented market without losing the visionaries, and the knowledge and expertise in these small businesses?

I believe the answer lies in technology and the increasing power of the internet in bringing together global audiences, and deliver content and services effectively through a variety of platforms and channels. There is no real benefit to consolidate the art industry as you risk losing the “soul” of these companies. What you really need is reputable marketplaces where the experts and small businesses can offer their art, their products, skills and services, but without giving up their independence and desire to stay small. I believe the future model is the online farmers’ market for the art world.

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