Saffronart - Bidding for Success

SAFFRONART Bidding for Success

RAKTIM CHOUDHURY 1501035 ANAND JS 1501066 AKKHIL SHAN 1501063

Saffronart Success

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Bidding

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What created the opportunity for Saffronart? Saffronart started as a part of the SaffronPlanet.com, set up by the owners, Dinesh & Minal Vazirani with Venture Capital funding. The initial objective was to provide high-end, exclusive art, fashion and health products from India to a global audience. In the early days of chaotic rapid ramp-up of business led to a lack of focus and control. The strategic objective of the firm was too broad and too loosely defined to have a planned strategy for implementation. For this reason, the Vazirani-s dropped the lifestyle and healthcare divisions from their business portfolio and decided to deal only in the Indian modern art market. This decision was partially because both the co-founders had studied art in college and had a deep connection with it. However, the true motive for pursuing the concept of an online art gallery/auction house was driven by a very clear opportunity that Minal & Dinesh Vazirani spotted in the Indian market.  

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The category for modern Indian art was not clearly defined. There were no auctions or exhibitions by any major auction house or gallery that was completely devoted to modern Indian art. The Indian art market was highly unstructured. The gallery-artist relationship, in the primary market, was not very strong. Galleries seldom developed expertise on specific arts and they failed to provide consistent support in bringing buyers and sellers together. The secondary Indian art market focussed mainly on Mughal miniature paintings and other antiquities or colonial style paintings. This market had little regard for modern Indian art and treated it mostly as decorative art rather than fine art. Modernist art was not perceived by the secondary market as of any value. Access to the best works of reputed artists was also very difficult. The primary market buyers, the galleries, were very cautious and wary of auction houses potentially bypassing them to establish ties directly with artists. This prompted them to restrict accessibility. Strong personal connections had to be established with the gallery owners, for collectors or auction houses to get access to the best art works. Authenticity of the art works was another issue. Neither the existing galleries nor the auction houses provided any guarantee of authenticity of the art-works. There was sporadic buying and selling of art and with the low level of expertise of the galleries, the authenticity of the art was always questionable. Indian fine art had a minimal presence in the international art market. The Indian modern art was largely seen as of colonial western style and the modernist Indian art was not recognized to have an original essence of its own. Whatever international transactions of Indian art used to happen, was mostly driven by Non-Residential Indians. Lack of steady revenue stream. The players in the market had no transparency in their business dealings. There was no established price setting mechanism. Prices for same art varied widely across galleries. Indian art did not enjoy the kind of price stability and predictability that the

western art enjoyed. There was no benchmark to compare against and the market was highly fragmented. The target of Dinesh and Minal was to use Saffronart to create a venture that can consolidate and lead the market for modern Indian art by enhancing accessibility to high quality art, ensuring their authenticity and bringing about a transparent price setting mechanism. They also saw an opportunity for Indian art in the international market. Over this, post economic liberalization, the Indian art market had not taken off the way it should have. Thus the Vazirani duo sensed a huge opportunity of creating a market for Indian fine arts and lead the growth surge.

Art Market Potential (in million USD) 30000 25000 20000 15000 10000 5000 0 2002

2003

2004

2005

2006

2007

2008

Germany 11%

UK 15%

France 17%

India

2009

2010

2011

2012

US 10%

Did Saffronart adopt the right Business Model? The objective of Saffronart was to give buyers access to the authentic works of the best Indian artists through a transparent price setting mechanism. The industry being fragmented was riddled with challenges and the Vazirani-s rose up to address each of those.

Customer Base: When Saffronart started off, the viability of on-line auction model in the Fine Arts space was far from clear. It was a big concern if the customers would agree to spend thousands of dollars to buy something as subjective as art over the internet. The founders realized that to boost confidence, the customers needed to see the paintings themselves. With this objective, they set about organizing a series of exhibitions across New York, Los Angeles and Hong Kong before their initial auctions. Subsequently they established permanent galleries in Mumbai, New York and London for putting lots on display, before taking them to auction. This way, when they were bidding online, the buyers had no doubt about the quality and authenticity of the art. The galleries at New York, Mumbai and London also helped to build an international customer base for Saffronart.

The second major challenge that Saffronart faced was that the customer segment for modern Indian art was very small. The genre was not well known and not well understood in the world and also in India. The initial customers were mostly from two groups: Indians living in India and NRIs (Non-Residential Indians). So Minal and Dinesh not only had to go about building a reputation for honesty and professional integrity in a market that was infamous for its lack of transparency, but they also had to educate potential customers about Indian art. In a way they acted as brand ambassadors of the Indian fine arts market. Minal & Dinesh expended considerable time, effort and money in creating detailed, high quality auction catalogues. The catalogues had high resolution pictures of the art, along with basic details of the work, a short biography of the artist and excerpts from critical reviews of his/her work. These catalogues went a long way to stimulate interest in the Indian fine arts market.

Sourcing: Gaining access to the best selection of Indian art was not easy, especially for a new entrant. There was a lot of hesitation on part of the collectors, dealers and galleries to tie up with an online start-up firm like Saffronart. There were no formal contracts for sourcing and all transactions were driven by personal relationships. The most critical issue on the sourcing side was trust. The galleries and consignors were also very concerned that Saffronart might bypass them and establish direct contact with the artists. Also there were concerns among competing consignors that Saffronart might not market everyone’s work equally. Saffronart was very patient and build sourcing connections one by one through personal interactions. They partnered with only the best and most reputed galleries. They accepted paintings after checking their provenance and being convinced of its authenticity.

Price Setting: Saffronart became the pioneer in bringing price transparency to the Indian art market. Reservation prices were set after carefully considering several parameters such as reputation of the artist, series to which the painting belongs, recent history of prices of comparable paintings. This transparency was a breakthrough in the Indian art market and also made it more attractive to the international customers.

Leveraging Technology: Unlike traditional art galleries, Saffronart laid a lot of importance on leveraging technology to improve operations. The online auction catalogue that Saffronart created, was a great source of advertising for Saffronart. Using technology, Saffronart ensures that only registered and verified individuals are allowed to bid. Moreover, each bid for every work in every auction is logged and recorded. A complete bid history is maintained. The online model and bid-tracking system ensured that there was not auctioneer-generated fictitious bid. The bid tracking system also gave Saffronart with unparalleled insight into buying behaviour and patterns since the company’s inception.

Revenue Source: Auction 70% revenue of Saffronart’s revenue comes from auction of art works. The auction process happens online over a period of 2 days, in contrast to traditional auction houses where auction happens over a few hours. This longer time slot gave the bidders more time to consider their purchase and make bids, often allowing them to stretch previously established budget. Three auctions were held every year and was main source of revenue for Saffronart. Fixed Price Offerings One of the major drawbacks of physical auction houses was that they did not have any steady revenue stream. To hedge the risk of depending on a single source of income, Saffronart also sold art online. However, the best works of art were sold through auction, as it generated the highest profitability. Contemporary Indian Art Saffronart further, widened its portfolio of offerings by diversifying into Contemporary Indian art. This segment found a very receptive audience among the young mobile art lovers and quickly started contributing significantly to the revenue stream.

What have they done right? The Vaziranis had ventured into a business space where the competition was weak. There was no existing industry structure to mediate between artists and consumers of artistic creations. By entering into the secondary market, they were able to influence the demand for modern Indian art. Taking advantage of the internet boom, they were able to capitalize on the interests of tech-savvy Indian diaspora. As the internet penetration increased, they were able to focus on Indian market too. The traditional art galleries do not put price on the art works, because they want to leave room for negotiation. But, being transparent on prices and providing archives on the histories of artists and their works, Saffronart gave a new dimension to the market. By opening the art market to the whole population, Saffronart was able to bust the vulnerability of the customers to information asymmetry. Though this process they were able to do three key things: spotting opportunity, acting on it and legitimizing them (“The new psychology of strategic leadership” by Giovanni Gavetti). They have succeeded in gaining the acceptance of the external stakeholders. They have established trust with different art galleries and consigners which helped them in sourcing quality art materials. By conducting exhibitions before the auctions and later permanent galleries, they have established authenticity for the value they offer to the customers. In a market not well established and studied in depth, the Vaziranis tried to educate the customers and thereby building reputation for honesty and professional integrity. This is particularly critical when the market is not known for openness or transparency. By making available the history of each bidder, they removed the suspicion of auctioneer-generated fictitious bids. This gave way to the entry of a lot new customers who were otherwise skeptical on the auction houses. The company also gained in studying the buying behavior and patterns.

What they have done wrong? By entering into a market space hitherto untested, the firm was able to create a new market. The market for modern Indian art has widened and deepened. Though Saffron art had the first mover advantage, the industry was not having any significant entry barrier. This led to the entry of many new auction houses which posed a competitive threat to Saffronart. The bargaining power of suppliers and customers also increased with the entry of new players. Many galleries, even forward integrated into secondary market as auction houses. The initial focus of the firm to establish trust and not enter into contacts with established galleries translated into lower switching cost for the suppliers. This led to difficulty in sourcing of high quality art works. Global majors like Christie’s and Sotheby’s had established partnerships with major galleries and at the same time Saffronart tried to compete in terms of reducing seller’s commission, which is not sustainable for a long term. While establishing network in the market, the Vaziranis played the entire role in trust building endeavor, which later on posed a challenge to the firm during expansion. As the firm expanded in business, they found it difficult to individually interact with each supplier or customer. Thus there was a lack of development of a professional team as the face of the firm apart from the Vaziranis. The promoters of the firm lacked the foresight to develop a professional team as the business grew exponentially. This was evident when individuals were reluctant to interact with other Saffronart employees other than Vaziranis. The restriction of operations to the Indian geography translated in to a disadvantage to the firm because other international players were able to source art works from outside India and also access to customers outside India. The firm also did not take into account the cyclical nature of the market and not diversified large enough instead of focusing into small number of products and geographies.

What can/should they do now? It is clear that Saffronart could no longer withstand the competition by confining itself into a small family owned firm. They should make most of the position they had built so far and take advantage of their reputation and capabilities. They should develop a team of professional managers to take forward the operations into the next level of expansion. Sourcing of art works should be developed into a separate organizational department instead of depending entirely on the Vaziranis. To ensure a steady supply of quality arts they should stretch out the possibility of exclusive partnerships or contracts with the galleries or collectors. This could even open up the possibility of backward integration, wherein Saffronart could collaborate with the galleries and establish a foothold in the primary market as well. This would ensure supply of quality art works and expansion of network with the artists as well. Diversification in terms of new products as well as geography has become a necessary thing for hedging the cyclical nature of the business. For an online auction firm like Saffronart could easily diversify into jewelry and collectibles, real estate and antiquities. They could also possibly consider expansion into south Asia in order to compete with the international competitors.