Asia-Pacific News

Retailers seeking China success have 'no real path' but to choose Alibaba or Tencent

Key Points
  • Chinese giants Alibaba and Tencent have become so dominant in China that companies hoping to crack the country's retail space have no choice but to team up with one or the other.
  • So says James Root of Bain & Company in Hong Kong
  • He calls China's retail market a 'laboratory' for the future
Companies like Alibaba bring the notion of their own ecosystem, expert says

Global retailers hoping to get into China's lucrative consumer market have little choice but to partner with online giants Alibaba or Tencent, a partner at Bain & Company told CNBC.

The two firms have become overwhelmingly dominant over the last four to five years, James Root told CNBC's "Capital Connection" on Friday.

Together, they have cornered more than 80 percent of China's e-commerce market — which is the world's largest — said Root who is also the chairman of global think-tank Bain Insights Group. The two companies also collectively own or control four out of five of China's largest hypermarket and supermarket chains.

What is Tencent?

"I'm describing a world of highly concentrated control amongst these two firms and the ecosystems around them," Root said.

"There is no real path for other retailers other than to choose one side here and then figure out the right partnership option to achieve their own objectives," he added, stressing that it holds true for both Chinese and international retailers.

He said it was "fascinating" how quickly Alibaba and Tencent were able to move in terms of dealing with competitive threats — whether it's in investing in them or buying them out to own them or shut them down.

Their innovative capacity also "stimulates others to innovate," he added.

'Different conversation'

Alibaba reported mixed fiscal first-quarter earnings on Thursday. Revenue soared 61 percent compared to a year ago, boosted by its core e-commerce business and fast-growing cloud division, but earnings fell short of expectations.

Meanwhile, Tencent announced on Aug. 15 that profit for the quarter ending in June fell 2 percent, the first decline in almost 13 years.

Alibaba is poised to keep growing, said Mark Mahaney, RBC Capital Markets lead internet analyst.

"This company is clearly aggressively investing in a whole host of areas," Mahaney told CNBC on Thursday, citing new retail businesses in China, acquisitions in Southeast Asia, as well as logistics and core entertainment.

"They clearly want to be much more than just an e-commerce player in China," he said. "They want to really offer everything to the Chinese consumer."

Alibaba wants to be more than just e-commerce player, says RBC's Mahaney

He added that Alibaba now has about 500 to 600 million active customers and daily average users across their spectrum of assets and will likely add another 100 million or 200 million over the next two years.

Regarding the U.S.-China trade war, Bain's Root said that Alibaba and Tencent are virtually immunized from it given that they are so far overwhelmingly focused on the domestic market.

"They make their living in China, so at some level it doesn't make any difference to them," he said. "They are still fundamentally about China for China."

"Twenty years from now, we'll be having a different conversation," Root said.