Threshold Resistance Read online

  James Lally, an accomplished Chinese porcelain expert with an MBA, was the president of our North American operations. Jim, who today runs his own very successful art dealership, never appeared comfortable in our early strategy meetings. I’m not sure he bought into my exercise, and I know he must have felt the heat of Dede’s ambition.

  Michael, John, Dede, Jim, and I went to work inventing the auction house that could beat Sotheby’s at its own game. The ideas that emerged from these brainstorming sessions directed the business strategy that would dramatically increase Sotheby’s sales. Looking at the decade of the 1980s, Sotheby’s auction sales increased five-fold from $573 million in the 1979–80 season to $3.2 billion in the 1989–90 season. I believe we propelled the entire art market—auction houses and dealers—to extraordinary new heights. When it came to developing centers, the Taubman Company had always taken into account external and interior design, image, branding, and an understanding of retailing psychology. The same would hold true at Sotheby’s. And just as our malls had challenged the insular department stores that crushed competition and controlled the distribution of brands, we aimed to bring new retail customers into a closed industry in which a relatively few individuals had been distributing the spoils.

  Initially, there were small, subtle changes. We dropped the Parke-Bernet identity (the company had been called Sotheby Parke Bernet since the acquisition), and simplified the name to “Sotheby’s.” The subtext “Established 1744” was added to the logo to underscore our venerable history. We redesigned the auction catalogs printed for each sale, establishing a single worldwide graphic standard with much larger type. The 9-point type we had been using was too small to read for anyone old enough to afford fine art!

  I immediately saw there were opportunities to dramatically improve the physical space at several Sotheby’s office and auction facilities. Apparently, I made quite an impression on the Sotheby’s staff in London when I took a practical but admittedly unorthodox approach to space planning. Author Robert Lacey in Sotheby’s: Bidding for Class writes:

  Graham Llewellyn [Sotheby’s UK CEO], knew that Alfred Taubman had taken control of Sotheby’s when he glanced out of his office window one day and saw the considerable bulk of his new American boss teetering precariously on the roof. Taubman was looking down at the jumble of chimneys and roof extensions that reflected the auction house’s growth over the years. Flow had been the secret of his success in the mall business, and he made the redesign and reordering of New Bond Street’s rabbit warrens one of his first priorities.

  On one of my less acrobatic space-planning tours of the New Bond Street facilities I noticed that there was a little-used storage room off the lobby. Although it had a very low ceiling, the space was perfect for a café to enliven the lobby and create a more welcoming feel to Sotheby’s historic front door. We raised the ceiling, added a kitchen on the level below the lobby, and installed a motorized dumbwaiter to deliver orders to the café. A simple video system allowed the kitchen and waitstaff to communicate effectively.

  Shortly before we opened for business, I received a call from a senior Sotheby’s executive in London. He was nearly hysterical and was concerned that our café looked too much like—perish the thought—a French café, one you might see on the streets of Paris! That was exactly the look we were after, and I assured him that our café would fit right in and be attractive to people from all over the world. And that’s precisely what happened. The Café (which is what we unimaginatively named it) was an instant hit. Clients stayed longer, staff held small meetings over lunch, visitors stopped in for tea and discovered Sotheby’s for the first time. We introduced a lobster sandwich on brioche bread (a London first) that put our simple but distinctive cuisine on the map.

  To further improve the customer experience in our London facilities we doubled the size of the main auction room and created a corridor that connected through the building from New Bond Street to Conduit Street. This helped rationalize the pedestrian flow and brought all departments together.

  In New York we added skyboxes in the main auction room to add capacity and offer privacy for consignors and bidders preferring a lower profile. More importantly, we broke down the barriers between our people and our merchandise. In New York, most of the goods were stored away, out of sight in a warehouse uptown, which was hardly the ideal venue for looking at fine art. So we added six floors to our converted Kodak warehouse on York Avenue to create a ten-story, 400,000-square-foot complex where our experts could work in close proximity to the artwork, and where clients could easily view whatever was coming up for sale. Building a new headquarters also helped create synergies. Once the renovation was completed, in spring 2000, a client visiting to meet with the jewelry expert might pass by the furniture department and see the perfect side table for her living room. We opened up the interior space to put essentially everything on view. The new facility also features fantastic exhibition and sales space.

  To expose our sales to an international audience we expanded the use of traveling exhibitions, which allowed potential bidders in Japan and Germany to view items that would be coming up for sale in New York or London. By making better use of our sixty offices around the world, we built larger audiences of bidders and consignors. We also formed an international advisory board to strengthen global relationships and fine-tune our client services. Assisting us were such respected business and cultural leaders as Baron Hans Heinrich Thyssen-Bornemisza de Kászon from Switzerland, Seiji Tsutsumi from Japan, the Honourable Sir Angus Ogilvy from the UK, Ann Getty from the U.S.A., Giovanni Agnelli from Italy, and the Infanta Pilar de Borbón, Duchess of Badajoz, from Spain.

  We reallocated our marketing dollars away from institutional advertising to public relations and our client services staff. Our press office, strengthened by the hiring of Diana Phillips in 1985, created excitement and buzz surrounding the sales, and the client services staff was the heart and soul of our point-of-purchase marketing efforts. We also developed promotional programs to increase the number of subscribers to our catalogs and publications. Sotheby’s Preview, a glossy magazine highlighting upcoming sales, profiling experts and clients, and celebrating the joys of collecting was significantly upgraded and transformed into an advertiser-supported publication. The thinking behind these moves, and behind much of our efforts at Sotheby’s, was relatively simple. Auctions can be elegant and highly efficient ways of selling goods, anything from Pez dispensers to Treasury bonds. But they work best—they get the largest possible price for the seller—only if there are a large number of bidders.

  To make sure I could sleep at night, we discontinued the sale of shrunken human heads, elephant tusks, and Nazi memorabilia. We also created an international art registry with the participation of law enforcement agencies around the world to help recover stolen art and limit the market for fakes and forgeries.

  To retain and reward our talented people we introduced a phantom stock option program, giving more employees a stake in the company for the first time. Sotheby’s had never had a problem attracting bright people, but many experts came to Sotheby’s for training and then went on to become art dealers. Offering stock to our key people dramatically improved our retention, but since we were a private company it was difficult to objectively value the stock. It was primarily for this reason that we took the company public in 1987. The stock initially traded on both the American and London stock exchanges, and Sotheby’s shares began trading on the New York Stock Exchange in 1988. The success of Sotheby’s shares and the generosity of our stock option program made a career in the art auction business more financially rewarding than it had ever been before.

  No one inside or outside the organization challenged the validity of these important but subtle initiatives. The same couldn’t be said of some of the more fundamental innovations, which aimed to shake some dust off a very sleepy and insular industry.

  In our brainstorming sessions we discussed our three primary groups of customers: art deale
rs, museums, and individual collectors. We came to the conclusion that dealers were both customers—our most important customers—and competitors. Dealers accounted for more than two-thirds of our sales. This reality was one of the reasons, in my opinion, that our service mentality had been so lacking. Professional dealers required far less hand-holding, promotion, and follow-through than individual buyers. They came to exhibitions with their clipboards in hand and dispassionately inspected and assessed the goods. At auction they bid with the same discipline and detachment. Essentially, they were superconfident customers looking for inventory to buy at wholesale and mark up in their own shops, where they played the role of salesman and adviser to less confident retail buyers. They were rewarded for this service by higher margins, just as Neiman Marcus is rewarded for displaying and selling Polo tennis shirts at full price.

  In a more negative light, dealers were also known to manipulate the auction process, forming illegal dealer rings. In what came to be called “the Wednesday lunch,” a group of dealers would determine who would buy what at what price at an upcoming auction, and set a date for their own private auction after the sale. In this way the goods were divvied up among the ring at the expense of the consignor and the auction house. Certainly not all dealers were involved in this skullduggery, but it was pretty clear to us that this was a widespread practice. This collusion had the effect of making what should be the ultimate efficient market—an open auction—into an inefficient one.

  Here’s where serial vision came in. We didn’t simply want to make existing auctions better. We wanted to change the nature of a hide-bound and inefficient business, and make it better. Without turning off our critical dealer customers, we wanted to add some competition in the salesroom. After all, just as was the case in our centers, Sotheby’s primary responsibility was to the person selling the goods. It was our job to create the most vibrant and exciting market possible in which they could showcase their merchandise. Passionate individual buyers would drive higher auction results and make it more difficult for dealers to control the process.

  To help develop larger numbers of individual buyers and strengthen Sotheby’s identity as an approachable, knowledgeable resource for collectors and connoisseurs, we invested in several areas of the business that had long been neglected. Sotheby’s International Realty, Sotheby’s Appraisal Company, Sotheby’s Restoration, Sotheby’s Educational Programs, and Sotheby’s Financial Services were all given new leadership and support. It was in the area of financial services that we really ruffled some dusty feathers.

  Art dealers historically had offered cash up front to sellers and extended terms to buyers. This was a tremendous advantage over the auction houses. Let’s say your rich uncle Harry from Harrison left you a terrific sporting painting, a well-wrought tableau of hounds, horses, and hunters. While you are very proud of the piece, college tuition bills have just arrived, and you could use some cash. So you head into Manhattan to visit an art dealer specializing in sporting paintings and to visit Sotheby’s.

  In the old days, the inevitably charming dealer would inspect your painting (typically with enthusiasm and grace) and offer to buy it at a specific price. If the amount were agreeable to you, he would write you a check on the spot. And by the way, if you wanted to select something to replace the painting, the dealer would sell it to you on credit, allowing you to pay off the purchase over several years. (This is how I purchased much of the art in my early collection.)

  Sotheby’s, on the other hand, would inspect the painting (perhaps with a bit less enthusiasm and grace), estimate what it might fetch at auction, and suggest that you place the painting in the next sale of sporting paintings, which could be as far off as six months. Even though the estimated sale price at auction could be twice the amount offered by the dealer, the uncertainty and wait at Sotheby’s were deal breakers. We set out to change the rules of the game, and level the playing field by introducing conservative financing policies to both sellers and buyers. Under the new rules, we would inspect Uncle Harry’s painting (with better manners), estimate its value at auction, and offer to write you a check for up to 50 percent of that amount. After the sale, we would send you an additional check for the balance—which had the potential to be significantly larger than the first payment, especially if we were to succeed in drawing more individual buyers to the auction room. Since a dealer is going to mark up the painting by 100 percent or more once he puts it in his window, our first check would probably be very close to the amount offered by the dealer. The second check would arrive from Sotheby’s in a matter of months.

  This tactic made us far more competitive in the quest for Uncle Harry’s sporting painting. Dealers were forced to work a little harder and write larger checks, but we didn’t see anything unfair about our financing policies. Another move we undertook to make the Sotheby’s experience more customer-friendly was more controversial. Christie’s and Sotheby’s had a longstanding practice of extending credit to dealers. But as we were reimagining the auction business as a luxury retail business, Sotheby’s decided to do the same thing that many of my department stores had done: help our customers finance their purchase. When we began offering credit on a larger, more formal scale to individual buyers, the Seurat hit the fan.

  Foul, cried the art dealers’ associations. Reckless, reported the art world press. To drive home their arguments against auction house financing, dealers and reporters hit upon the sale at Sotheby’s of Vincent van Gogh’s Irises on November 11, 1987. Put up for auction by John Whitney Payson, Irises was purchased by Australian businessman Alan Bond for $49 million ($53.9 million including the buyer’s commission), at the time a record price for any work of art. John Marion, who was at the podium that evening in New York, captured the drama of those historic few in his book, The Best of Everything:

  Before long there was spirited bidding between two collectors on telephones manned by Sotheby’s staffers. I felt like a referee in a tennis match as the bid bounced from one phone to the other: Forty-seven million now. Forty-eight million for it. Forty-nine million dollars now. I have forty-nine million dollars against you in the center…will you say fifty? At forty-nine million then on the far phone. At forty-nine million then. All done…you still there? Fair warning. Sold! For forty-nine million.

  The room exploded with applause, but the art world grumbled in protest. Many believed that because we extended credit to Bond, the price was somehow illegitimate and would artificially inflate the market. Never mind that we extended credit to dealers all the time. And never mind the fact that dealers arranged credit for buyers all the time.

  Several months later, when Bond ran into financial trouble and was having difficulty paying us back on schedule, there were more breathless headlines. But the situation also demonstrated the appropriateness and conservative nature of our financing policies. At the first sign of trouble, we took possession of the painting, which was always available to us as collateral. Bond consigned several other paintings from his collection to cover his obligations. And in 1990 we sold Irises a second time for a substantial commission to the Getty Museum, where it hangs to this day, overlooking the Pacific Ocean in Malibu.

  In fact, Irises was one of the most profitable objects ever represented by Sotheby’s. But the controversy was so great, we discontinued the practice of accepting the object being bid on as collateral and decided not to lend on any art within twelve months of purchase. We did, however, continue to take bids on credit and offer advanced payments to sellers following very conservative lending practices. Mitchell Zuckerman, who is president of Sotheby’s Financial Services, has done a great job of making financing a dependable and significant competitive tool and income stream for the company. His loan portfolio performs year in and year out with a minuscule default rate.

  But financing wasn’t the only Sotheby’s initiative that came under fire unfairly. Sotheby’s had a venue called the Arcade, where items of more modest cost—principally decorative art, furniture, and collectib
les—were offered for sale. Buyers could get a bargain on a beautiful dining room set, classic stemware and flatware, or garden statues. Before I became involved, lots were exhibited for the convenience of the dealers. If there were twenty dining room tables in the sale, the tables were all together in one area of the exhibition space. Chairs were in a separate area reserved just for chairs, even if they matched the tables. The place looked like a flea market, but the dealers, clipboards in hand, didn’t mind sorting dispassionately through the inventory. But for individual buyers, this arrangement was a veritable wall of threshold resistance

  As Milton Petrie and Leslie Wexner knew, I had some pretty firm ideas about how best to design shopping areas in a way that broke down barriers between customers and the merchandise. I thought we should arrange the dining tables and chairs in room settings. We might even place flatware, dishes, and stemware from the sale on the table—the way people use these beautiful items in their homes. Side tables were placed beside an heirloom headboard on a colorful Heriz carpet. On the walls were framed mirrors, prints, and paintings. We carried this display technique over to our catalogues as well.

  As you might guess, individual buyers found the groupings helpful in making their buying decisions, and attendance at our Arcade auctions increased dramatically. But the art world was furious. I was accused of turning Sotheby’s into Bloomingdale’s. This guy from Detroit, who had already destroyed downtowns the country over with his huge malls, was “malling” the art world. He was hanging mirrors on walls and placing chairs with tables! Of course, what we were doing was breaking down threshold resistance. Competition and new ideas were shining rays of light into their secretive, exclusive, largely unregulated world. And the art world was not happy.