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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

The exterior of New York’s Wallspace gallery, which announced it would close next month.
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 furor 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.
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.”

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