Art sales: Phillips crisis

In 1796, when George III was on the British throne and the US was a newly independent nation, a young man called Harry Phillips, who had been head clerk at Christie's, founded his own London auction house. For the next two centuries, Phillips ploughed a steady furrow in the middle market, selling brown furniture and unspectacular paintings. As Sotheby's and Christie's became glitzy retailers to the rich and famous in the late 20th century, Phillips stuck to the old ways.

It was only four years ago that the winds of change started to blow along the corridors of Phillips' London headquarters, but they soon whipped up to hurricane force. A long overdue package of reforms turned into an insane attempt to challenge Sotheby's and Christie's head on, which Phillips, de Pury and Luxembourg, as the auction house is now called, made more than a third of its employees redundant, abandoned regular sales of Impressionist art and announced that it will move out of its glossy Manhattan headquarters. The French billionaire Bernard Arnault disposed of the last of his minority holding in the company. Phillips, which was supposed to become a major force in the art market, is left with just half a dozen departments and some 85 employees.

This journey to disaster started out sensibly enough. In early 1999 Chris Thomson, a hard-nosed Scot who had recently taken over as chief executive of Phillips, decided that it was time to shake up the sleepy, unambitious auction house. Thomson knew nothing about the art market but had plenty of business experience and decided to smarten up the New Bond Street headquarters, trim the chain of regional salerooms and move slightly upmarket. Although Thomson wanted to sell more six-figure paintings, he had no intention of challenging Sotheby's and Christie's directly until Arnault bought Phillips in November 1999. But the Frenchman's LVMH group has made a fortune from marketing scent, champagne and suitcases and Arnault believed that selling art would be no different.

The Thomson plan went out of the window as Arnault, fuelled by his rivalry with Christie's owner François Pinault, poured tens of millions of pounds into his new venture, much of it in guarantees paid to vendors regardless of how their artworks performed in the saleroom. Over the next three years, the art dealers Simon de Pury and Daniella Luxembourg joined the company, which changed its name, and the British end of Phillips was sold to Bonhams because the new regime was uninterested in the middle market. Last year, Arnault decided to cut his losses and hand control of Phillips to de Pury and Luxembourg and last week he ended his ill-fated venture altogether.

What has happened would have been farcical had it not been so tragic. The merger between Bonhams and the British end of Phillips cost around 250 people their jobs and resulted in the virtual disappearance of the Phillips name in Britain after more than 200 years.

What was left of Phillips was like a head without a body. Sotheby's and Christie's derive much of their income from the middle market, yet Phillips had sold this part of the business to concentrate on the top end, where the overheads are highest and profits hard to make. The strategy blithely ignored the fact that there is hardly enough great Impressionist art around to supply two auction houses, let alone three. Once Arnault withdrew funding, Phillips could no longer afford many guarantees and immediately hit problems in this high-profile sector of the market.

In November Phillips' sale of Impressionist and modern art in New York raised a derisory £4.5 million, one seventh of what had been predicted. Most paintings failed to sell, including Picasso's Buste de femme souriante. Now, Phillips will concentrate on contemporary art, design, photography, American and Swiss paintings, jewellery and watch sales. It will deal in Impressionist art privately and may hold the occasional auction.

Whether it can survive in this truncated form is uncertain. What is clear is that the events of the past three years have been an unnecessary tragedy bornof arrogance and stupidity. Harry Phillips must be turning in his grave.