Behind the impeccable period exteriors of the world's greatest auction houses, a feud is raging like no other in the history of business.
Society London seems an unlikely home for the last global industry in which Britain rules the world. But behind the immaculate period exteriors, the exclusive squares of Mayfair, Belgravia, Knightsbridge and Kensington is the setting for one of the longest-running and most bitterly combative sagas in the whole history of business. Coke doesn't much like Pepsi, Yamaha isn't too keen on Honda, Unilever fires itself up just by thinking about P and G. But the atmosphere of these legendary contests is jolly compared with the glacial English hostility - a chill which would turn Vinnie Jones soft at the knees - which emanates from the feud between the world's leading auction houses, Sotheby's and Christie's.
From their elegant premises barely a stone's throw apart in Mayfair, Christie's, Sotheby's and Phillips, the world number three, bestride the auction trade in a manner reminiscent of Britain's Victorian heyday. Together with smaller Bonhams, the world number four or five, they account for three-quarters of world auction sales, their combined total in the annus mirabilis of 1989 notching up £3.2 billion. New York shades London in volume as an art centre, but there too "Christeby's", as rivals bracket the Big Two, effortlessly head the crowd - as they also do in Geneva, Amsterdam and almost anywhere else where important auctions are held. But the West End of London is the epicentre, a seething commercial entrepot and clearing-house for art scholarship and gossip: "Nowhere else in the world," says Bonhams's affable deputy chairman Paul Whitfield, "are so much expertise, so many dealers, collectors, connoisseurs and museums concentrated in such a small area as this part of the UK."
That auctioneering should be reserved territory for the aristocratic British houses is a tribute to the country's rapacious history (which is why its country houses are still an unparalleled storehouse of art treasures). It is also due to Britain's liberal import-export regime, the auctioneers' entrepreneurial opportunism and a competitive spirit which puts most of British industry to shame.
This tiny patch of London seethes with rivalries and jealousies. At the best of times the participants prefer not to speak of each other by name, referring stiffly, when they have to, to "King Street" (Christie's) or "Bond Street" (Sotheby's), and ignoring the smaller firms snapping at their ankles. But these are far from the best of times. Ever since Sotheby's, older and more adventurous, over-extended itself in a previous cycle and was acquired by US property developer Alfred Taubman in 1983, relations between them have grown steadily chillier. The temperature now stands at absolute zero. "All the gloves are off," confirms Christopher Weston, chairman of rival Phillips. "It's warfare out there."
Part of the difference is style. The traditional saying is that Christie's is a firm of gentlemen trying to be auctioneers, whereas Sotheby's is a group of auctioneers trying to be gentlemen. Certainly, under a US owner unencumbered by art-world proprieties, Sotheby's behaviour in the 1980s was a shock to traditionalists. It imported aggressive management and financial practices (guaranteeing prices, lending to buyers, setting up a real estate operation) which were not only foreign to a conservatively run industry but could have had the effect of driving its chief rival out of business.
If that was the Sotheby's plan, it failed, but it changed the nature of the game. Christie's, and Bonhams and Phillips, too, have had to strip away any vestige of business amateurism to survive. Although it plays the English conservative card for all it is worth - "We have a very distinctive culture here," murmurs London managing director Dermot Chichester - Christie's current group managing director came up through the printing operation rather than the saleroom, and chairman-elect Sir Anthony Tennant, an eminently safe pair of hands, is better known for his City connections than connoisseurship. Translation: Sotheby's policies may be dictated by accountants from the US, as industry gossip has it, but the bean counters aren't too far away at Christie's either. Phillips, by way of contrast, likes to underline the fact that in Christopher Weston, a highly regarded auctioneer, it has the only chairman who still takes sales two or three times a week.
After two centuries of competition, the firms are used to watching each other like hawks. But hostilities have been seriously exacerbated by the recession. When Christie's knocked down Van Gogh's Portrait of Dr Gachet to a Japanese buyer in May 1990 for £49.1 million, the highest auction price ever paid for a work of art, the hammer also descended on an art-market bubble which had been inflating without pause since 1985. As recession took hold, and investment buyers disappeared, "unsold" ratios at King Street and Bond Street soared. In November that year, 13 paintings from the estate of Henry Ford II failed to reach a price that Sotheby's had guaranteed, and thus had to be taken on to Sotheby's books. Seven months after the triumphant Dr Gachet sale, Christie's was making 145 people - nearly 10% of its headcount - redundant, while Sotheby's was closing provincial showrooms and reorganising in similar moves to cut costs. "Gross turnover (auction sales) has now fallen 60% from the 1989 high," comments Sotheby's managing director for Europe, Roger Faxon, grimly. "That's a dramatic reduction. The business adjustments we have had to make are dramatic, too."
Apart from cost-cutting and redundancies, "adjustments" take the form of unprecedented competition to woo sellers of art works, the key to a successful auction business. In the past, each firm devoted a large amount of its effort to maintaining connections with previous clients. One of Christie's greatest strengths is its close ties with the great English country-house collections, while Weston claims to be dealing with fourth-and fifth-generation customers at Phillips. But traditional brand loyalties are fading - or rather, as Faxon puts it, "traditional affiliations are no longer enough. You have to give customers another reason to continue to give you their custom."
Extra service is one way the companies compete - and services have proliferated in the 1980s. "It's extraordinary what we do for clients already," says Faxon "and we'll certainly do more." Blending, in equal measure, show biz, commerce and fine-art scholarship, the auctioneers over the last 20 years have prospered by turning themselves into highly professional marketing operations. Glossy colour catalogues and professional publicity departments are only part of it: the seven Cezannes sold at Christie's last November, for instance, had previously been on a sales tour to drum up interest in Zurich, New York and Tokyo - no trifling matter.
As for financial services, for years the companies have discreetly lent money against properties consigned for sale; more riskily they have sometimes also lent to buyers and, even more riskily, guaranteed prices for vendors. Sotheby's led the way in systematizing its quasi-banking operations, but Christie's is determined to follow suit. "Collectors increasingly think of their art objects as a portfolio," says Chichester. "For many people, we're advisers on their largest asset - it's big money, and we have to treat it as such. Financial services are crucial to the future of this business."
Restoration is another new service area. But while clients have grabbed the new services with both hands, in recession it is still money that talks loudest, and sellers have been driving ever harder bargains just for the privilege of selling their collections. Auctioneers make their money, or "margin", on the commission they charge both buyer and seller, theoretically 10% each. In reality, although Phillips and Bonhams (especially) are doing better, gross margins at Christie's and Sotheby's have shrunk to 14-15% as they compete to offer vendors more and more favourable terms. One dealer recounts how a traditional Christie's family was approached by Sotheby's last year with an offer in effect to sell its properties free. The family stayed with Christie's, but only after extracting an equally good offer from King Street.
The problem is that Christie's and Sotheby's need 16-17% across the board to cover overheads. At present volumes of business, the Big Two, with their huge international art-gathering infrastructures, extra services and high fixed costs, including highly qualified staff delivering identification and valuation expertise (still the heart of the business), are barely profitable. Sotheby's may well make a loss this year, and Christie's will only just avoid it. Jeremy Delmar-Morgan, senior partner at stockbroker Teather and Greenwood, believes that neither is currently making money on the vendor side. "No one accuses Pepsi and Coke of not competing," complains Chichester, "but they don't kill each other on price. We've got into a price war which shouldn't have happened. The whole industry is suffering."
To outsiders, the situation now looks like a very dangerous game of poker. In any other business, points out Whitfield, observing from Bonhams, Christie's and Sotheby's would have started to dismantle their costly international infrastructures and lower their cost base. But neither of them can back off for fear of handing the business to the other. Faxon says bluntly: "We are a worldwide firm. We aim to participate in every significant market there is." Far from cutting back, Sotheby's, like Christie's, is expanding in the Far East, and neither can afford to ignore France, a large but protected market which in theory will open up to foreign firms after 1993. Says Chichester: "It may seem counter-intuitive, but it's particularly in thin times that you can't cut back. It's the spread that brings in the business."
In this situation, something had to give. And in early November Sotheby's triggered a fresh round of upheaval by announcing that from January it was raising the buyer's premium (where no negotiation is possible) from 10% to 15% on lower-priced lots. "We held off as long as we could," defends Faxon, "but we could see no sign of improvement in volumes for the next quarter. We don't think this change will affect sales much, but it will add substantial earnings at the top line, and we hope the bottom line, too."
Sotheby's announcement was deeply unpopular with the trade. Art dealers, who have lost a substantial part of their market to the auction houses in recent years, bitterly resented the original imposition of the buyer's premium in 1975, and have been as bruised by the recession as the auctioneers. Their immediate response was rage that they were being asked to pay for Sotheby's bloated overheads. "To my mind they are into far too many non-essential things like financial services," says Charles Lee of antique dealer Ronald A Lee. "They should stick to being auctioneers, getting the best price for their properties."
Christie's and Phillips were also annoyed - but for a different reason. They understood only too well the pressures which produced such desperate measures. "It really is horrendous that the firm seen by the public as world leader should have such an incredible turnround into loss," says Weston at Phillips. But could they afford not to follow suit? For all the protestation, they may have little choice but to do the same: the extra margin gives Sotheby's latitude for negotiating rates with vendors that they cannot allow to exist for long. Only Bonhams, relatively secure in its resilient middle-market niche, is resisting the upward move. "No, we won't do it," states Whitfield categorically. "To an outsider it's a ludicrous decision - but I'm deeply grateful to Sotheby's for doing it. It's very good news for us."
Where all parties are united, however, is in deploring Sotheby's timing. Auction houses and dealers have been battling to maintain London's liberal tax and heritage regulations in the face of strong EC pressure for harmonisation, increasing daily as the single market approaches.
Especially resisted in the UK is a Brussels proposal to levy VAT on the import of all works of art into the Community - a proposal whose main effect, claim British experts, would be to drive the international auction trade out of the EC altogether, to the benefit of tax-privileged locations such as Geneva or New York. Up till November 1992, the Government was battling stoutly but alone to have the successful British regime prevail. But how could it maintain its position when the biggest auction house was raising its premium as if prices didn't matter? "The timing couldn't be worse when we are lobbying Parliament on the VAT issue," says Chichester frostily. "I can only assume that the American masters weren't aware of what's at stake. I don't thank them for that at all."
However, although the EC measures, if introduced, would inevitably create a new pan-European playing field for the auctioneers, it's unlikely that a new entrant could mount a challenge in the short term. The immediate danger for the great auction houses is the troubles within the industry rather than external influences. Indeed, the houses may now be facing their hardest strategic decisions since the advent of cheap colour printing, international air travel and the abolition of capital controls helped create the modern art market after the war.
If, as Paul Whitfield points out, the original James Christie would have no difficulty recognising how the auction firms still conduct their business, he might be less at ease with the ruinous competitive expansion of fixed-cost infrastructures in the wake of investment demand that can now be seen to have been a blip.
In a more sober, less inflation-ridden world, where speculators are no longer paying stratospheric sums for Impressionist paintings to sell again the next month, the result is an industry - or a top end of it - which even after 20% cuts can only make decent profits at the peak of the cycle. It's possible that the new rate of buyer's premium will provide a breathing space - it's also possible that it will push some business back towards the long-suffering dealers or the resurgent Bonhams. It's possible that a new upsurge in inflation or unrest will set off a fresh round of investment in painting or antique values - it's also possible that trade war and world depression have the opposite result. It's possible that a combination of cost-cutting, improvement and a modest increase in volumes could preserve the structure of the industry through the next cycle - but the last time round saw the takeover of Sotheby's and the onset of a qualitatively different kind of competition. It's possible ... Ladies and gentlemen, what am I bid?
Sotheby's Holdings Inc
The oldest but perhaps not the wisest
Auction sales/turnover (ie gross auction margin plus other)/pre-tax profits 1991: $1104 million /$222million/$21million. Chairman: Alfred Taubman. Clients: Duke of Westminster, Duke of Northumberland, Earl of Rosebery, Baron Thyssen. Sales: 1744: first sale of a collection of "Polite Literature" (£826); 1957: Weinberg collection (first exclusively Impressionist sale); 1958: Goldschmidt collection (£781,000 in 21 minutes); 1978: Mentmore House contents (£6.4million); Von Hirsch collection (£18.5 million); 1983: Gospels of Henry the Lion (£8.1million, record price for book); Turner's Seascape: Folkestone (£7.4 million); Florence J Gould collection ($34million - record price for single-owner). History: biggest and oldest (1744) UK auctioneer. "Invented" Impressionist market in the 1950s under Peter Wilson, who also bought Parke Bernet in New York (1964) to create first art multinational. Went public in 1977; bought by US property magnate Alfred Taubman in 1983 for £80 million, ushering in turbulent decade. Strengths: size, technology (first sales by satellite), internationalism. Weaknesses: ownership doubt, competition with Christie's. Persistent rumour says the firm is now for sale.
The gentlemen who keep a stiff upper lip
Auction sales/turnover/ pre-tax profits 1991: £583 million/£103million/£6 million. Chairman-elect: Sir Anthony Tennant. Clients: Duke of Devonshire, Lord Coke, Marquess of Cholmondeley. Sales: 1793: Mme du Barry's jewels (£10,000); 1848: Duke of Buckingham's collection (£77,562); 1882: Hamilton Palace (£397,562); 1970: Velasquez's Portrait of Juan de Pareja (£2.3 million - first to break £1million barrier); 1984: Chatsworth Old Master drawings (£20 million); 1987: Van Gogh's Sunflowers (£24.75 million); Bugatti Royale car (£5.5 million); 1989: Pontormo's Portrait of Duke Cosimo I de'Medici (£22.3 million - record price for Old Master); 1990: Badminton Cabinet (£8.58 million - record price for non-painting); Van Gogh's Portrait of Dr Gachet (£49.1 million - record price for work of art). History: established 1766 by James Christie, a Scot. After 150 years of pre-eminence, galled to lose ground to "Bond Street" (Sotheby's). Went public 1973. Started South Kensington middle-market offshoot 1976. Had to cut back in '80s. Now running neck and neck with Sotheby's in market share. Strengths: Englishness, connections, expertise. Weaknesses: ruinous competition with Bond Street.
Phillips Son and Neale
Flexibility and loyalty bring in the business
Auction sales 1991/ turnover and profit figures not published (private company): £91 million. Chairman: Christopher Weston. Clients: Fourth-and fifth-generation English families. Sales: 1798: Sir Joshua Reynolds' pictures, Marie Antoinette's furniture; 1820: Duke of Kent's wine cellars; 1821: Napoleon's chattels; 1836: William IV's effects (only auction ever held in Buckingham Palace); 1991: Polly Peck's English furniture (£4.5 million). History: third chronologically and in size of UK (and world) auctioneers, also most idiosyncratic. Founded 1796 by ex-Christie's clerk, Phillips is a private unlimited company with 40 shareholders, all working partners. The only auction house whose chairman is still "in the rostrum" (conducting auctions). Unlike rivals in having 20 UK provincial salerooms, bought in 1970s. Attempt to set up US organisation a costly failure. Would like to build saleroom network in Europe. Sales have resisted recession better than bigger brethren, but it has still had to scale back. Strengths: Flexibility, continuity, client and staff loyalty, very hard working. Weaknesses: too small to compete with "Christeby's" (eg Impressionist department didn't work), too big to be Bonhams.
Energetic and unstuffy, with a friendly staff
Auction sales 1991/ turnover and profit figures not published (private company): £21.5 m. Chairman: Gurth Hoyer Millar. Customers: Faithful clientele interested in marine paintings, ceramics, modern applied arts - "next century's antiques". Biggest sale: 1990: Portrait of a Boy in a Persian Dress by Jan Van Lievens (£583,000). History: Long almost invisible beside Big Three, now making small waves as niche player since arrival of new management from Christie's South Ken in 1985. Still family presence on board. Energetic and unstuffy, Bonhams appeals to collectors daunted by Christie's and Sotheby's in the middle-market £1,000 to £10,000 bracket. Strong in silver, furniture, Japanese works of art and prints and Chinese porcelain, Bonhams has pioneered new segments - modern furniture, ceramics, Hollywood ephemera. Does not participate in mega-ticket market, so relatively unaffected by recession. Has its own vigorous "South Ken" in Chelsea providing own in-house management ginger group. Strengths: friendliness, publicity, "we-try-harder"; not Sotheby's or Christie's. Weaknesses: small size makes it hard to trade up to the bigger-ticket items on which greater profits can be made.