GERALDINE DAVID #, CHRISTIAN HUEMER+, KIM OOSTERLINCK# Art Dealers’ Inventory Strategy The case of Goupil, Boussod & Valadon from 1860 to 1914 ABSTRACT Proper inventory management is crucial for art galleries. Yet, despite its importance, inventory management has been overlooked in the literature. We distinguish four main strategies used by art dealers to manage their inventory and use this classification to set the inventory strategy of Goupil, Boussod & Valadon, a major art gallery active in France at the end of the 19th century, into perspective. Goupil’s books cover the sale of more than 25,000 artworks between 1860 and 1914. Rapidity to sell was a key element in Goupil’s strategy. Out of the sold artworks, almost 75% were sold within a year. Goupil required a slightly higher mark-up for artists from which he held a large inventory. Mark-up for artists in residence and the likelihood to sell their artworks at a loss were lower, signaling a preoccupation for their long-term market. JEL Codes: N14, N44, Z11. Keywords: Art market, Art Gallery, Goupil, Boussod & Valadon, Inventory Strategy # Université Libre de Bruxelles (ULB), SBS-EM, 50 av. Roosevelt, CP 114/03, 1050 Brussels, Belgium, [email protected] # Research Center, Österreichische Galerie Belvedere, Prinz Eugen-Straße 27, 1030 Vienna, Austria, [email protected] # Université Libre de Bruxelles (ULB), SBS-EM, 50 av. Roosevelt, CP 114/03, 1050 Brussels, Belgium, [email protected]. Art Dealers’ Inventory Strategy The case of Goupil, Boussod & Valadon from 1860 to 1914 ABSTRACT Proper inventory management is crucial for art galleries. Yet, despite its importance, inventory management has been overlooked in the literature. We distinguish four main strategies used by art dealers to manage their inventory and use this classification to set the inventory strategy of Goupil, Boussod & Valadon, a major art gallery active in France at the end of the 19th century, into perspective. Goupil’s books cover the sale of more than 25,000 artworks between 1860 and 1914. Rapidity to sell was a key element in Goupil’s strategy. Out of the sold artworks, almost 75% were sold within a year. Goupil required a slightly higher mark-up for artists from which he held a large inventory. Mark-up for artists in residence and the likelihood to sell their artworks at a loss were lower, signaling a preoccupation for their long-term market. JEL Codes: N14, N44, Z11. Keywords: Art market, Art Gallery, Goupil, Boussod & Valadon, Inventory Strategy 2 Art Dealers’ Inventory Strategy The case of Goupil, Boussod & Valadon from 1860 to 1914 Introduction In most businesses, inventory management is important, as large inventories, put a strain on the finances of companies. Arguably, inventory management is even more important for art galleries. Inadequate inventory management poses a direct threat to galleries’ survival (Moulin, 1967; Horowitz, 2011). For example, Milo (1980, p. 66) explicitly mentions the large inventory of artworks by René Magritte, when his market was not as established as today, as one of the reasons of the failure of the Centaure Gallery in 1932. Inventory and rent represent galleries’ largest expenses (Shubik, 2003). Other elements, which galleries share with other retailers active in the luxury industry, render inventory management complex. Whereas for consumption goods several methods exist to evaluate demand, for artworks demand is highly uncertain. In this case, the literature highlights the need to create a safety stock (Wild, 2002). This need is reinforced when supply cannot be guaranteed – as is the case for the art market. Guaranteeing a large supply is however not easy for galleries since they are often undercapitalized. Galleries with relatively limited means tend indeed to have the smallest inventories possible (Mahé de Boislandelle, 2005, p. 185). This approach minimizes risk but it might also limit the ability to sell. Uncertainty in the art market also pertains to the timing of the sale. An art dealer may believe a given artist will become successful in the future and therefore build a large inventory of the artist’s work. Yet, success may take time to materialize. 3 Meanwhile, capital is tied up. Besides the financial costs related to the need to finance the inventory, art dealers have also to take into account storage and insurance costs. These elements are not specific to art galleries and reflect issues faced by many other actors in the luxury industry, such as for example jewelers. In both cases, however, inventory turnover may be lower than in other industries because of a high mark-up. As pointed out by Williams et al, (2012, p. 648) “Companies that sell high mark-up items, such as jewelry stores and art galleries, can operate successfully with much lower inventory turnover rates.” The relationship between turnover and mark-up is therefore also crucial. Galleries have adopted several strategies to address the challenges posed by inventory management (Fage, 1930; Gee, 1981; Jensen, 1994; Moulin 1967; Velthuis, 2005). In general, it seems that art dealers rely on four main strategies1: 1) The first strategy consists in buying artworks following a client’s commission. In this case, the role of the dealer is limited to intermediation. Instead of having a stock of artworks, the dealer works as a broker buying only artworks for which he already has a client. This approach requires the least capital. As the dealer has no inventory, stock cannot represent a financial burden. 2) The second strategy, very close to the first one because it does not require keeping an inventory, is to work with consignments. For contemporary art, uncertainty regarding the ability to sell artworks from a non-established artist renders the acquisition of a large stock of artworks extremely risky. Consignments allow minimizing the risk. The artists consign the artworks to be sold to the dealer who is in charge of exhibiting them. The proceeds of the sale are then divided between the two according to an agreed-upon ratio (Velthuis, 2005, p. 61). Consignments have become common since World War II. As for 1 The remainder of the article provides more details on these strategies. 4 the first strategy, the dealer has no stock. This approach requires however more capital than the first one, as rent has to be paid. 3) The third strategy, especially present for dealers with limited resources, aims at limiting the financial burden of inventory by guaranteeing a large turnover. Jeremy Cooper (1985, p. 45), a former art dealer, highlights for instance the importance of speedy sales because art galleries are usually undercapitalized and need cash flows. Accepting a lower mark-up to guarantee a speedy sale is common in this approach. Alternatively, dealers with limited resources may decide to share the acquisition of an artwork with other dealers to limit the financial burden created by inventory. 4) The fourth strategy is for art dealers to rely on a large inventory. This strategy is capital-intensive and may therefore be hard to sustain. Moulin (1967) distinguishes two approaches within this strategy. The first approach is to create a large inventory of well-established artists and to buy continuously on the market when opportunities arise. This is the approach favored by the Wildenstein dynasty (Moulin, 1967, pp. 102-103). In this case, margins have to be high because the low speed of sales forces art dealers to fund a large inventory (Bernier, 1977, p. 341). The second approach is to focus on the artists “discovered” by the dealer. Then, the dealer often requires a right of first refusal or a monopoly on the artists’ production. In this case, building the inventory is less costly than for well-established artists but dealers face the risk to have to fund this inventory for a long period, the time for the artist to be recognized. By the end of the 19th century, it became more and more frequent for art dealers to enter in a contractual relationship with artists to buy their production in exchange of a fixed sum. The dealers Paul Durand-Ruel, Daniel Henri Kahnweiler and Ambroise Vollard all relied on this approach (Moulin, 1967, p. 114, Velthuis, 2005, p. 61). Contractual relationships could however also prove 5 disastrous for dealers if the hoped-for-success did not materialize. In this case, and as pointed out by Milo (1980, p. 63), “The merchant is quickly overwhelmed by the paintings that accumulate in his shop or gallery”.2 These different strategies allow setting art dealer’s practices in an analytical framework. This does not mean however, that art dealers adopted only one strategy, nor that they could not change their strategy as their business evolved. Ambroise Vollard is for example mostly associated to the fourth strategy. Yet, at the beginning of his career, he relied on the first strategy, and in general only bought artworks if he already had a client (Morel, 2007, p. 278). The same holds for Paul Durand-Ruel. Even though his general strategy was to discover new artists and hold a large inventory of their work, at the beginning of his career, he sometimes bought artworks with the objective to sell fast even if it meant earning a low margin (Kelly, 2014). The aim of this paper is to determine the interplay between inventory strategy and mark-ups. More precisely, in this study we aim to analyze the relationship between the time in inventory and mark-ups in order to gain an understanding about inventory strategies pursued by art dealers using the example of Goupil. Based on this case study, the article will discuss to which extent some of the conclusions drawn from the Goupil case may be valid for other large art dealers. There are indeed, to the best of our knowledge, no quantitative analyses of art galleries’ inventories.