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First quarter aggregate auction sales are up three per cent to $783.4m, but profits are being squeezed because of competition for market share with Christie’s.

An inspection of the company’s investor briefing, released last month, gives some clues as to where the challenges and rewards lie.

Firstly, Sotheby’s have gained ground on Christie’s overall auction market share in the past couple of years. In 2006, the two auction houses together totalled $8.1bn of sales, with Christie’s accounting for 54 per cent of that. In 2007, the total had risen to $10.96bn, but Christie’s share had fallen to 51 per cent.

Look closely at where that money was spent, however, and it becomes clear just how important the contemporary art market has become to the two leading auction houses.

While all other categories remained relatively stable, shifting only one or two per cent in either direction in their contribution to Sotheby’s aggregate sales total, contemporary art changed dramatically. In 2006, it accounted for 18 per cent of sales by value, but in 2007 it made up 25 per cent of the total.

Bearing in mind that Sotheby’s aggregate sales total rose from $3.75bn to $5.4bn, in real terms the value of the company’s contemporary art sales actually doubled, from $675m to $1.35bn.

With such a valuable prize at stake based on a single category of sales, it is little wonder that Sotheby’s chose to highlight the increasing cost of competition between themselves and Christie’s in their first quarter results.

And it is exactly in those areas where money has to be spent in order to sustain the competition that Sotheby’s say they would cut costs in the event of a downturn: bonuses ($65.8m in 2007), marketing ($19.8m), travel and entertainment expenses ($30.8m), professional fees ($53.4m) and direct costs chiefly relating to catalogues ($80.4m).

The company’s decision to move away from the middle and lower end of the market to concentrate on high-value lots has also led to a shift in their client base. This can be seen most graphically in the profile they publish of clients who appear on various rich lists.

For example, in 2006, Sotheby’s clients included 68 from Forbes’ list of the world’s 100 richest people; in 2007, that had risen to 86. Of Forbes’ 400 richest Americans, the relative figures were 136, rising to 341. Forbes’ 100 richest Americans: 57 rising to 92.

By 2007, Sotheby’s clients also included all the top ten billionaire art collectors, with around ten per cent of all clients coming from the hedge fund/financial services industry.

Despite all this, Sotheby’s have become more cautious on the guarantees front – the area that has fuelled much of the competition between themselves and Christie’s as they battle it out for the best consignments.

Sotheby’s issued a total of $450m of guarantees throughout 2006 and $902m worth in 2007, but in what the company call “the light of current economic realities”, they have reduced the maximum level of guarantees at any one time from $500m to $350m.

Interestingly, on an aggregate basis, Sotheby’s have never lost money on their guarantee portfolio in any year since they first started issuing guarantees in the late 1980s. And, even as they become more cautious, they note that the risk of loan defaults remains minimal: only 0.5 per cent, or $11.7m, of the $2.26bn loaned since 1991 has been lost.

But, however important the contemporary art market is, there are other boom categories: in 2007, Sotheby’s sales of Russian art rose by about 25 per cent, while Asian art sales increased by about 50 per cent in value.

Sotheby’s turnover for 2007 was up 38 per cent year on year to $917.7m. Profits may be tighter with the competition, but as they rose by 91 per cent to $204.8m in 2007, showing the company operating at a margin rate of 22.3 per cent, it seems that there is room for manoeuvre yet.

By Ivan Macquisten