🧢 Italic - Bringing C2M to the West
Overlooked #104
Hi, it’s Alexandre from Eurazeo (ex. Idinvest). I’m investing in seed & series A consumer and consumer enablers startups all over Europe. Overlooked is a weekly newsletter about venture capital and underrated consumer trends. Today, I’m sharing some thoughts about Italic which is a US-based e-commerce marketplace sourcing high-quality goods directly from manufacturers and offering them at a price that is 50-80% lower than branded products.
In a previous issue, we looked at the rise of the Consumer to Manufacturer (C2M) trend in China. It’s a model in which you’re cutting retail middlemen (mainly brands and retailers) by empowering manufacturers to sell directly to end-consumers. I think that C2M is a major e-commerce disruption. In Asia, all the e-commerce giants have C2M initiatives (JD, Alibaba, Pinduduo). In Western countries, C2M is coming with players like Shein and Italic leveraging a manufacturing tissue mainly in China.
Shein is already a massive business selling fast-fashion goods at extremely attractive prices. It generated $10bn in sales in 2020 and it has become the 1st fast-fashion company in the US ahead of brand names like Zara or H&M. If you want to learn more and understand how Shein is also leveraging a C2M model, you should check these two papers from Not Boring and Rest of World.
In this post, I’ll focus on Italic which is the second most compelling example of a company bringing the C2M model to the West. Italic was founded in 2018 by Jeremy Cai who is serial entrepreneur and whose family has a manufacturing background in China.
After interviewing hundreds of manufacturers in China, the US and in Europe, in November 2018, he launched its marketplace and announced a $13m funding round with investors like Comcast, GFC, Index, Ludlow and Kindred.
In November 2021, Italic raised a $37m series B led by Canaan with 100 top angels participating like Dylan Field (Figma's CEO) and Carlos Cashman (Thrasio's CEO). Italic also announced a key shift in its model opening its marketplace to anyone when it previously was a membership-only experience.
Italic is a noteworthy company to follow for several reasons:
It brings the C2M model to the West
It’s a “private label in a box” offering for manufacturers
It has done several iterations to build the perfect membership
It wants to build the “next everything store” for value-driven purchases
It escapes the D2C categorization
1/ Bringing the Consumers to Manufacturers (C2M) model to the West
C2M is a new paradigm for manufacturers in which new platforms will empower them to distribute for the first time directly to end consumers.
Instead of selling a product with no inventory risk and a low 10-15% margin after labor costs and COGS, manufacturers take the inventory risk and can expect to improve by 2-3x their operating margin if they successfully sell their inventory.
It's a trend coming from China. It started with local players like Pinduoduo but we now see players leveraging this model to sell overseas which is the case for both Shein and Italic.
2/ A "Private Label in a Box" Offering for Manufacturers
Italic is empowering manufacturers to launch a private label with a suite of products. It has 4 key building blocks in its offering:
Private label manufacturing OS: understand the upcoming consumer trends to decide what are the new products to manufacture, forecast and follow the sales of the items you manufacture.
Cross-border payment orchestration: single account for manufacturers to receive in local currency the revenues generated by their sales.
Fulfillment: send the stock to Italic's warehouse which will store your inventory and manage the shipping to the final customer in an offering that is similar to Amazon FBA.
Supply chain management: manage efficiently the shipping between the factories and Italic's fullfilment centers.
As a result, Italic can be described as a managed marketplace for manufacturers as it aggregates their products into a marketplace while offering them a large suite of products & services.
3/ Several Iterations to Build the Perfect Membership
Italic made several iterations of its membership.
It launched in 2018 with a $120 membership (but free for the 1st year). It removed it because it had not enough SKUs to justify it.
In Apr. 20, it reintroduced an annual $120 membership that all Italic's customers needed to pay in order to buy products.
In Nov. 21, Italic re-opened its marketplace to everyone and shifted its subscription. It's now a $60 annual subscription that gives you access to special perks.
Its $120 annual membership was similar to Costco's membership because: (i) you had to pay it to be entitled to buy products from the store and (ii) Italic was generating its contribution margin exclusively on the membership fee (and not on the products which were sold at cost).
It was also a way to build a community of early adopters who will be massive buyers of Italic's products. When you pay for a subscription, you're more committed to check every product release, to purchase more Italic products and to be more vocal about how great Italic is. I think that it really contributed to create momentum around the project.
Nonetheless, at some point, this exclusive subscription became counter-productive because to keep pushing towards higher value (the best possible quality for the lowest possible price), you need to have scale effects because higher volumes means lower production costs for manufacturers. Italic's efforts to reach economics of scales was slowed down by this exclusive marketplace model.
Moreover, there is a growing consumer subscription fatigue. Subscriptions are popping everywhere and consumers don't want to combine too many subscriptions. There is also this psychological threshold that is extremely hard to bring a better bargain to consumers than subscriptions like Netflix, Amazon Prime or Spotify which are giving a lot of content/perks compared to their price.
4/ Building the next everything store which will be the go to place when your key purchasing factor is not price nor brand but value
I believe that most consumers care more about value (the quality that you get compared with the price that you pay) than about brands for 80% of the purchases that they make in their lives.
You will agree to pay a brand premium when that particular brand releases a product in a field that you're passionate about. If you like to cook, you may purchase an iconic Le Creuset's cast iron Dutch oven and you won't be price sensitive. Otherwise, you will always try to maximise value and in that case, Italic is often the best option that you will have.
Italic has a value-centric offering that is super compelling because it's a label that I trust across categories. In comparison, Uniqlo is also a value-centric brand but only in fashion. It's a shame because it's a brand I trust and I'll be willing to buy goods from Uniqlo in other categories if they existed
At the same time, it's key to remember that Italic's prices remain inaccessible for the "invisible half" who cares uniquely about price. In that regard, it's super interesting to note that the other thriving C2M model that is thriving in the US is Shein which centers its whole value proposition around super low prices. Caring about value chain sustainability and manufacturers' working conditions remain a luxury that most consumers cannot afford. We should never forget this.
5/ Escaping the D2C categorisation
It's not hype to be a D2C business in 2022 (iconic B2C companies are underperforming in public market or were exited at maximum $1bn, they’re suffering from increased CAC with Facebook/Google replacing the fees taken by retailers in the offline world, hard to go from one product to a multi-category offering and lack of defensibility).
Italic managed to escaped the D2C box by being proactive at solving its shortcomings: (i) multi-category from day 1, (ii) defensibility via its managed marketplace model, (iii) trying to enhance its economical equation via a membership.
I think that we'll see more and more e-commerce founders starting with a D2C offering tweaking the model to become broader businesses like Italic.
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋