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http://www.artmarketmonitor.com/2015/07/30/if-contemporary-art-is-so-great-why-doesnt-anyone-make-any-money/
If Contemporary Art Is So Great, Why Doesn’t Anyone Make Any Money?
by

James Tarmy digs into Magnus Resch’s startling look at the economics of running an art gallery. The result isn’t pretty. After reading the book, Tarmy says, “It turns out that the upbeat world of biennials and art fairs and parties is in fact a cutthroat, antiquated, deeply flawed industry hampered by an obsession with keeping up appearances and an often misguided aversion to making money.”

Here are some more of the startling things Tarmy discovered in Rensch’s book:

  • Fifty-five percent of the galleries in Resch’s survey stated that their revenue was less than $200,000 per year; 30 percent of the respondents actually lost money; and the average profit margin of galleries surveyed was just 6.5 percent.

  • In the U.S. and Germany, the physical cost of an exhibition space was listed as galleries’ greatest expense (in the U.K. it was second), and Resch writes that “the almost unanimous, and unquestioned, conviction that central premises in a major city are essential simply cannot be justified with an economic rationale.” In other words, collectors will go wherever the art is, and everyone else—the inevitable crowds at openings, the passersby who pop in to see whatever’s on view—has no bearing on the gallery’s bottom line.

  • Galleries generally split the sale of a work 50/50 with the artist. Resch argues that—given that galleries often have to cover marketing, production, shipping, and insurance costs—it should be closer to 70/30. Cue artist outrage.


http://www.bloomberg.com/news/articles/2015-07-30/why-do-so-many-art-galleries-lose-money-
Why Do So Many Art Galleries Lose Money?
The art business is booming, but many galleries are barely getting by. One German expert thinks he knows the answers
by
James Tarmy, July 30, 2015 — 10:38 PM BST
 

The exterior of New York’s Wallspace gallery, which announced it would close next month. Source: Object Studies, New York via Bloomberg

On Tuesday, the highly respected Wallspace gallery in Manhattan’s Chelsea neighborhood announced it would close its doors permanently on Aug. 7. The lease was up, and “it necessitated a reevaluation,” said Jane Hait, who co-founded the space with Janine Foeller. “It’s a particularly tough climate for people doing work that’s not necessarily super commercial.” The closure of such a celebrated fixture of the New York art scene underscores the fact that—despite the unprecedented avalanche of money blanketing the contemporary art world—it’s surprisingly difficult for galleries to make money.

The news of Wallspace’s closing comes just weeks before the English release of Management of Art Galleries, a slim, Day-Glo orange book that caused a furore when it was published in Germany last year. Written by a 31-year-old German entrepreneur/professor/art adviser named Magnus Resch, the book argues that most galleries are undercapitalized and inefficient, and moreover, that with McKinsey-like business strategies (Resch went to the London School of Economics and the University of St. Gallen, in Switzerland), the entire art market could be turned into a profit-generating machine. “I could have just said, ‘The revenue numbers are terrible,’ but rather than being so negative I’m actually offering solutions,” Resch says in an interview. “It’s based on the analysis that I did.”
Magnus Resch, who authored the controversial book Management of Art Galleries. Source: Magnus Resch via Bloomberg

Under different circumstances, Resch’s claims would probably have been waved away, but in what’s close to a first for the gallery world, he has the data to back them up.

Last year, Resch sent out an anonymous electronic survey to 8,000 galleries, and more than 16 percent, or about 1,300 people, responded with information about their revenue, number of employees, and location. (The original version of the book included data for just Germany. The English translation includes data for the U.S., the U.K., and Germany.)

The results are grim: Fifty-five percent of the galleries in Resch’s survey stated that their revenue was less than $200,000 per year; 30 percent of the respondents actually lost money; and the average profit margin of galleries surveyed was just 6.5 percent. (Lest a critic argue that the pool was too skewed to rural galleries selling crafts, or decorative arts galleries buckling under the weight of their unsalable Louis XV chairs, 93 percent of Resch’s respondents represent contemporary art galleries.)

After laying out his data and methodology, Resch isolates what he considers galleries’ key impediments to profitability.

The Rent Is Too High
In the U.S. and Germany, the physical cost of an exhibition space was listed as galleries’ greatest expense (in the U.K. it was second), and Resch writes that “the almost unanimous, and unquestioned, conviction that central premises in a major city are essential simply cannot be justified with an economic rationale.” In other words, collectors will go wherever the art is, and everyone else—the inevitable crowds at openings, the passersby who pop in to see whatever’s on view—has no bearing on the gallery’s bottom line. Paying a premium for a desirable location, according to Resch, is therefore pointless.

Artists Make Too Much
Galleries generally split the sale of a work 50/50 with the artist. Resch argues that—given that galleries often have to cover marketing, production, shipping, and insurance costs—it should be closer to 70/30. Cue artist outrage.

Gallery Staff Make Too Little
This is an interesting one. Resch discovered that the more a gallery spent on employee salaries (percentage of revenue allocated to employee salaries vs. profit margin), the more profitable the gallery became. In one respect, this makes intuitive sense: Once a gallery is successful, it can afford to pay its employees more. But Resch says that higher pay, tied to performance, is a greater incentive—the more money employees make by doing well, the more they want to succeed.

Everyone Is Selling the Same Thing
Resch points out that the vast majority of galleries were competing for the same, tiny world of contemporary art collectors. Diversify, he suggests. This is easier said than done, though: Sure, the contemporary collector base is small—but the group interested in other periods (11th century illustrated manuscripts, say) is even smaller. That’s basically why everyone is selling variations of the same art; it’s simply what collectors want to buy.

Resch has other points—galleries are terrible at marketing and branding; they’ve done a horrible job of expanding their collector base; they’re not active enough in the secondary market; they fail to innovate their business models in any measurable way—but those are less connected to the data and more closely aligned with Resch’s background in business. His recommendations (he’s careful not to call them solutions) range from the reasonable (galleries should have rigorous contracts with their artists) to the jaw-droppingly silly. In an effort to spice up the sales experience, for example, he suggests that galleries use sparklers to denote sold works at openings, and he makes the bold and perhaps unintentionally self-deprecating statement that, due to the art world’s low salaries, “the best educated people … will almost always choose another industry to work in.” Ouch.

The realities of the primary art market depicted by Resch’s data, however, are harder to argue with. It turns out that the upbeat world of biennials and art fairs and parties is in fact a cutthroat, antiquated, deeply flawed industry hampered by an obsession with keeping up appearances and an often misguided aversion to making money. No wonder a gallery like Wallspace was forced to close. “Our primary focus didn’t always correlate with financial success,” according to Hait. “It’s unfortunate, because galleries doing things like we were trying to do have a tough time staying in business.”
 

http://en.artmediaagency.com/112875/do-art-galleries-need-to-review-their-business-model/
Do art galleries need to review their business model?
Berlin  |  6 August 2015  |  AMA

Magnus Resch’s book, Management of Art Galleries, has just been published in Great Britain. The book is based on a survey that was conducted of 8,000 galleries (with 1,300 respondents) in order to present a study of the art galleries based in Germany, the United States and Great Britain. The questions asked in the form covered the galleries’ revenue, their localisation and their employees. The author considers that galleries adopt particular strategies to improve their profits, making them more competitive on the market. In an article published on Artnet, he explains that the first initiative to be taken should be “love the market and start talking about money”. The book has stirred up controversy, especially in terms of its angle, which was deemed rather simplistic by a number of specialists. Art Media Agency decided to go over the book’s key points in order to better grasp its scope.

The work starts off with the following question: “why are galleries losing so much money when the art business is booming?” This observation can be supported by a number of prestigious galleries who were forced to shut down: Galerie Kamm, based in Berlin, closed its doors in 2004, and the New York gallery Wallspace will put an end to its business on 7 August 2015. The survey conducted by Magnus Resch himself is bringing to light the economic difficulties that galleries are facing: 55% of these galleries have stated that their revenue was less than $200,000 per year and 30% of the respondents are actually losing money each year. The average profit margin of these galleries is 6.5%.

It’s true that these numbers affirm that galleries are not all a surplus to the needs, but it’s important to nuance this statement: the surveyed galleries are far from homogeneous and some selection bias should be brought to light. Not all participants in the survey are the same size, which has an impact on their total revenue. Moreover, the survey covers three countries in which the art market differs: in an article he wrote for Artnet, Resch points out that the German art market is more reluctant to talk about economic profit, which is not the case in Anglo-Saxon countries.

Following the assessment of a low economic profitability, Resch suggests a number of recommendations, which he has formulated from his observations. By studying the expenses of the galleries, Resch listed the rent as one of the highest expenses (first in the United States and in Germany. According to him, central premises in a major city cannot be justified with an economic rationale: it’s the offered objects that should attract potential buyers and not the location of the gallery.

The second element Resch proposes is to review the revenue sharing between the galleries and the artists they represent. The majority of them operate on the 50/50 principle: artist and gallery equitably share revenue from sales. Magnus Resch believes that the galleries bear significant costs such as promotion, production and the costs associated with insuring the works. Consequently, revenue sharing must be returned to the galleries to make them more profitable. As such, the split of the sale should be the gallery receiving 70% of revenues, leaving 30% to artists. This point in particular is quite controversial because the remuneration of artists’ work is fundamental.

The survey also demonstrates that there is a correlation between the galleries’ employees’ salary and its revenue. According to Resch, a higher salary attracts better qualified people and improves the profitability of the gallery. In his article “Why Do So Many Art Galleries Lose Money?”, James Tarmy emphasises that the link between the two is not that obvious: it’s more likely that because the galleries are profitable they can pay their employees higher salaries.

Finally, Resch focuses on the structure of the galleries’ business: the majority of the galleries (93 %) are specialised in contemporary art. Resch points out that there are too many contemporary art galleries compared to the number of buyers. He suggests that it would be smarter to turn to other less competitive segments of the art market. However, James Tarmy explains that contemporary art is in high demand, and if there are that many galleries specialised in that sector, it’s to meet the demand. Specialising in a different sector would thus not increase the volume of sales nor the profitability of galleries.

Resch is an entrepreneur of German origin, specialised in art. He founded an art gallery at the age of 20 and currently works as a Management of Art professor at the University of St. Gallen in Switzerland.

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