Beyond the Numbers: Advice From the Art World’s Most Controversial Economist

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Magnus Resch

guest author

Facts first: 30% of all art galleries are loss-making.

The market is tiny. All of the players combined—I mean Sotheby’s, Christie’s, and all the other auction houses, plus all the galleries and dealers, including Gagosian and Zwirner—make less than the annual revenue of—yes—Dell. Clearly, the market conditions are far from attractive on a macro scale.

There are some galleries, however, that do make money. Their stand-out performances were what interested me when I started to research the management of art galleries 10 years ago. I wanted to find out what they do differently. I started by collecting data from a sample of 8,000 art galleries worldwide, which I then analyzed and validated with industry experts—practitioners who could put my interpretation to the test. By the end of this process, I found some answers. It seems that the key success factor is what I call “the organizational model.” 

The Artist Career Life Cycle

If we break it down, galleries can be conceptually organized into streams that align with the career steps of an artist’s life cycle. I identified three key phases:

The Shopping Phase is characterized by young artists exhibiting at varying locations, particularly off-space, who are funded by scholarships and hope to be spotted by an Alpha or Beta gallery. 

The Decision Phase includes more mature artists, who enjoy a level of popularity, who have found their role in the art market, and who may or may not have representation. 

The Final Phase sees the departure of the vast majority of artists, who abandon full-time work as artists and follow other pursuits, while just a small fraction are successful and are traded on the secondary market, both during their lifetime and after their death.

When I ask my gallerist clients to describe the artists they work with, an overwhelming 90% exhibit artists from the shopping phase or the decision phase. The stock answers are that they “work with young artists;” they also have “some artists that they have represented for quite some time;” and, in almost every case, that they “don’t do secondary market.” This last point is where the problem starts. If one clear fact overshadowed the others in my investigations, it is that profitable galleries are all active in the secondary market.

I hear your protests of “I can’t be active in the secondary market because I don’t have access to secondary works or collectors.” My reply is simple: you haven’t tried it because you are too busy preparing the next exhibition with a shopping phase artist. I’m not suggesting that you abandon your initial aspirations to build up the next artist generation, but my research suggests that you can shift your focus and consider an alternative model.

Interestingly, being active in the secondary market isn’t exclusively practiced by the larger galleries. Even smaller galleries are very active here. When I looked at them in more detail, I was surprised to find that they all work along similar organizational lines: no matter how big they are, they all reflect the life cycles of artists by employing a three-tier trading structure. To simplify it, I use the concepts of the “Garage,” the “Gallery,” and “Fine Art.”

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“If one clear fact overshadowed the others in my investigations, it is that profitable galleries are all active in the secondary market.”

A Three-Tier Trading Structure

The Garage is your exhibition space for emerging artists. Its aim is to create a dialogue with the local off-space scene and artists, and establish a gallery brand within the art community. The Garage is run and organized by one part-time employee, preferably a young student, connected to the art scene, with aspirations to become an art gallerist. New York dealer James Fuentes does it brilliantly. He converted his small showroom in the back of his gallery into the Garage and rebranded it Allen & Eldridge. Here his team puts on eight to 10 shows a year. No extra costs, not too much work, and maximum impact.

The Gallery most closely resembles traditional contemporary art gallery practice. In the new model, however, the Gallery drastically limits exclusively held artists. An average Gallery—one owner with one employee—simply cannot exclusively represent 15 artists. Artists won’t get the best from you, and your bottom line will suffer. Focus! A reasonable number of artists for an average-sized Gallery to represent, and for whom they also act as agent, is between one and four. You can show as many as you want, but successful galleries focus on a handful of artists.

Fine Art is the third and final part of the organizational concept. Eventually, your artists from the previous phases will move up to this level, but in most cases gallerists are at high risk of going out of business before the miracle happens. This is where the secondary market is your savior. Start working with pieces that are traded on the secondary market, and make this a priority. This is where the most attractive margins are, and where competition is least fierce. A great example of this is Augusto Arbizo from Eleven Rivington, whose approach to secondary market involvement is spot-on. Starting with works by the forgotten Moira Dryer in 2014, he has found his entry point into the secondary market.

In case you’re still not convinced, let me reiterate the two main advantages that galleries tell me about when they employ the three-fold organizational structure: 

• First, a foothold in all three stages generates higher and more diversified revenue—and more sustainable profits. The Garage and Gallery activities are often not profitable, and the overheads then kill you. So every single deal in Fine Art is precious. 
  
  
• The second advantage came as a surprise to me, but my clients all talked about the advantages of dealing with artworks of higher value. As one client told me, “It feels special. It’s not only the piece that is of museum quality but you get to know different collectors. And those, I can cross-sell my younger artists to.” 

Obviously, no amount of studying or academic research will deliver a foolproof blueprint for the perfect management of galleries. Countless factors can create success or cause failure, and some gallerists display great creativity with their ideas. In my book I present some tried and tested approaches that others are employing—gallerists we can all learn from as the art world continues to evolve.  

—Magnus Resch