Jeremy Cai - Manufacturer to Customer – [Founder’s Field Guide, EP. 33]

Jeremy Cai - Manufacturer to Customer – [Founder’s Field Guide, EP. 33]

At a Glance

Jeremy Cai is the founder and CEO of Italic, a subscription-based consumer goods marketplace platform that works directly with manufacturers. The main theme of this episode explores how technology infrastructure can enable manufacturers to bypass the brand intermediary and go directly to consumers. The most impactful insight of the entire episode: Jeremy Cai argues that "whoever owns the inventory owns the upside" — traditional brands capture a 5-15x markup over manufacturing costs, while manufacturers earn only 4-5% profit. Italic's goal is to make manufacturers their own merchants.

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Theme 1: Italic's Business Model — Subscription + Direct-from-Manufacturer

Jeremy Cai believes that Italic's core is not a consumer goods company, but a technology and operations platform providing "private label as a service" to manufacturers.

• Consumer side: Pay a membership fee ($120/year) to access over 1,000 self-developed products, priced 50-80% lower than traditional brands. Italic earns almost no contribution margin on these products.
• Supply side: Italic does not purchase inventory; instead, it lets manufacturers bear inventory risk. In return, manufacturers earn 2-3 times the profit they would from traditional brand orders. Italic provides payment orchestration, operational networks, distribution, technology tools, and global consumer reach.
• Difference from Costco: Costco relies on stores as advertising and word-of-mouth; Italic must heavily educate consumers through digital channels. The membership fee is twice that of Costco ($120 vs $60), and consumers face subscription fatigue.
• Effect of membership: After launching the membership model in April 2020 (peak of the pandemic), purchase frequency accelerated from twice a year to once every 4-6 weeks, order depth increased, and AOV remained unchanged. The membership created a flywheel: more members → more manufacturers joining → more SKUs → attracting new customer segments.

> Jeremy Cai's assessment: "The membership truly shifted our cultural DNA from traditional retail to technology and operations—because we monetize through membership fees."

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Theme 2: Profit Distribution in Traditional Supply Chains — Manufacturers Are Severely Squeezed

Jeremy Cai argues that in traditional supply chains, manufacturers bear the heaviest production responsibilities yet earn extremely low margins, which is the fundamental opportunity for the Italic model.

• Traditional chain: Manufacturer (production cost $15) → Brand (procurement at $20) → Distributor → Retailer → Consumer (retail price $100). The manufacturer earns only $4–5 out of the $100 consumer price, while the brand captures a markup 5–15 times the manufacturing cost.
• Brands squeezing manufacturers: Brands demand a 20% price reduction year over year by expanding order volumes, leaving manufacturers with a profit margin of just 4–5%. "If you rely entirely on one client and they drop you, you go out of business."
• Manufacturer's predicament: Highly dependent on cash flow, manufacturers typically require a 30% deposit from brands to finance raw materials and labor, and factor the remaining 70% of receivables at 80–90 cents on the dollar.
• Evolution of DTC brands: Early DTC brands (e.g., Bonobos, Everlane) indeed saved 30–50% by eliminating retailers. However, with Facebook/Google traffic costs now surging, DTC brands no longer offer genuine value discounts. Consumers are buying brand stories rather than cost-effectiveness.

> Jeremy Cai's assessment: "Manufacturers have never owned distribution channels. They are entirely dependent on brands. And the way brands make money is by buying low and selling high — which inherently incentivizes them to keep pushing manufacturing costs down."

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Theme 3: The Evolution of the Manufacturer’s Role—Design Authority Has Shifted

Jeremy Cai argues that over the past 15–20 years, manufacturers have internalized R&D and design capabilities, providing the product foundation for a direct-to-consumer model.

• Change in the manufacturer’s role: In the past, brands provided complete design specifications; now, manufacturers have their own showrooms, and brands select from existing manufacturer offerings with minor adjustments. This has become the norm in categories such as apparel and kitchenware.
• Consequences of the design authority shift: Manufacturers receive feedback from multiple brands (20–30 clients), making them a "central intelligence source" for trends. The brand’s role has shifted from "creating from scratch" to "curating and developing."
• Consumer decision dichotomy:
• Emotional purchases: Buying the brand (e.g., Chanel handbags, Supreme), seeking status symbols—Italic can never win over such consumers.
• Rational purchases: Buying for value (e.g., bedding, kitchenware), indifferent to the brand—this is Italic’s target market.
• Different decisions by the same consumer: The same Chanel consumer may care about the brand for handbags but not for kitchenware—"People switch between rational and emotional modes across different categories."

> Jeremy Cai’s assessment: "Brands are more powerful than ever, and they are not going away. But in value-driven purchases, consumers only care about quality, design, and price—not the brand name."

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Theme 4: Italic’s Technology and Operations Infrastructure — The "Missing Layer" in Cross-Border E-Commerce

Jeremy Cai believes that cross-border e-commerce infrastructure (payments, logistics, technology) remained highly underdeveloped in 2021, forcing Italic to build many underlying systems from scratch.

• Payment Challenges: Western payment giants such as Stripe and Adyen have no operations in China. Italic had to build its own payment orchestration system: USA → Hong Kong entity → China entity → final supplier. TransferWise also cannot make payments to Chinese companies.
• Logistics Challenges: Traditional cross-border supply chain cycles take 18–24 months (product development 6–12 months + production 2–3 months + ocean freight 1 month + receiving 14 days). In contrast, Asia (e.g., China) can achieve 1–2 day delivery and $1–3 shipping cost per order, thanks to manufacturers being close to consumers.
• Technology Gaps: Shopify does not serve cross-border marketplace platforms; operating software in China requires an ICP license and a local entity.
• Italic’s Solution: Build its own three-layer infrastructure—payments, logistics, and technology—so that manufacturers can digitize their product catalogs, manage inventory, and reach consumers quickly.

> Jeremy Cai’s assessment: "We spent three years looking for these service providers, and they simply don’t exist. So we had to build everything from scratch."

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Theme 5: Pricing Thresholds and Multi-Category Strategy — Two Key Insights into Consumer Behavior

Through his work with Italic and Not Pot, Jeremy Cai has identified two counterintuitive patterns in consumer behavior.

• Pricing Thresholds: When Italic's prices were 15-20% lower than DTC brands, that was insufficient to drive consumers to switch. Only when discounts reached 50% or more did significant brand-switching behavior emerge. "No one wants to be the cheapest option, but if you can play that position well, it's a very good position."
• Multi-Category Strategy: The traditional DTC approach of "one hero product → category expansion" rarely succeeds (Jeremy has seen only 1-2 successful cases). If you want to operate across multiple categories, you must start from day one. Italic therefore launched SKUs at an extremely rapid pace (from 1,000 to 1,600) to prevent consumers from categorizing it as a single-category brand.
• The Not Pot Lesson: The CBD brand Not Pot, co-founded by Jeremy and his girlfriend Katie, is the opposite of Italic — all the tools already existed, with no need to innovate the supply chain; only brand building, product sourcing, and selling were required. It validated the decision-making framework of "when to build in-house and when to buy."

> Jeremy Cai's assessment: "What consumers say they will buy and what they actually buy are two different things. You have to test with the market, not assume."

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Mentioned Positions

Position	Guest Sentiment	Key Data
Italic	Bullish (Founder's Perspective)	1,000-1,600 SKUs; Membership fee $120/year; Prices 50-80% lower than traditional brands; Purchase frequency accelerated from 2 times per year to every 4-6 weeks
Costco	Benchmark (with differences)	Membership fee $60/year; No advertising; Stores serve as advertising
Pinduoduo	Positive Reference	Representative of China's C2M model; Direct sourcing from factories
Stripe / Adyen	Missing Service	No operations in China, unable to make payments to Chinese companies
TransferWise	Missing Service	Unable to make payments to Chinese companies
Shopify	Not Applicable	Does not serve cross-border marketplace platforms
ShipBob / ShipMonk	Positive Reference	3PL service providers, but only cover part of the supply chain
Flexport	Positive Reference	Digital freight forwarder, manages marketplace service model
Pilot	Positive Reference	Bookkeeping as a service, marketplace model
Not Pot	Positive Reference (Co-founder)	CBD brand; Case study on build vs. buy decision
Bonobos / Everlane	Historical Reference	Early DTC brands that truly eliminated middlemen
Chanel / Supreme	Comparison Case	Represent emotional purchases, where Italic cannot compete
Xiaomi (Youpin) / NetEase (Yanxuan) / JD	Positive Reference	China's C2M platforms, but difficult to replicate in the West

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Judgments Worth Remembering

1. "Whoever holds inventory has the upside" (Jeremy Cai) — Traditional brands earn a 5-15x markup over manufacturing costs, while manufacturers capture only 4-5% profit. Italic lets manufacturers bear inventory risk but earn 2-3x the profit of traditional orders.

2. The pricing threshold is 50%, not 20% (Jeremy Cai) — When Italic's price is 15-20% lower than DTC brands, it is insufficient to trigger switching; only at a 50% discount does significant brand-switching behavior emerge. This is a counterintuitive consumer behavior pattern.

3. Multi-category must start from day one (Jeremy Cai) — The traditional DTC brand strategy of "one hero product → category expansion" rarely succeeds (the author has seen it only 1-2 times). Italic therefore launches SKUs at an extremely high pace to prevent consumers from categorizing it as a single category.

4. Manufacturers have internalized design capabilities (Jeremy Cai) — Over the past 15-20 years, manufacturers have shifted from "producing to spec" to "having their own showrooms and design teams." The brand's role has moved from "creating from scratch" to "curating and fine-tuning."

5. Cross-border e-commerce infrastructure was still severely lacking in 2021 (Jeremy Cai) — Stripe does not operate in China, TransferWise cannot make payments to Chinese companies, and Shopify does not serve cross-border marketplace platforms. Italic had to build its own three-layer infrastructure for payments, logistics, and technology.

6. Consumer decisions are "category-level" rather than "personality-level" (Jeremy Cai) — The same consumer may make an emotional purchase on handbags (buying Chanel) but a rational purchase on kitchenware (buying Italic). Brand loyalty is category-specific, not cross-category.

7. The C2M (Customer-to-Manufacturer) model is difficult to replicate in the West (Jeremy Cai) — In China, because manufacturers are close to consumers, delivery can be achieved in 1-2 days with shipping costs of $1-3 per order; in the West, cross-border supply chain cycles can take 18-24 months. This is a structural difference, not something that can be resolved in the short term.

8. "A brand is a seal of consistency" (Jeremy Cai) — The core value of a brand is not design innovation, but rather "if I buy a product from brand X, I get the same thing every time." Manufacturers can produce products of equivalent quality, but they cannot replicate the brand's promise of consistency.