44. The Business of Jiu Jitsu (part 2)

Opportunity to build a scaled franchise operator in the jiu jitsu market

Let’s explore a few different angles of this jiu jitsu idea. In the last post, we mentioned how there are 10k gyms in the US, which is a very fragmented market.

According to Perplexity.ai, below is a quick profile on the largest jiu jitsu franchises in the US.

Gracie Barra

• Founded: 1986 by Carlos Gracie Jr. in Rio de Janeiro, Brazil

• Global locations: Over 700 affiliated schools

• U.S. locations: Approximately 100

Gracie Barra is recognized for its structured training programs and strong community values.

Gracie Jiu-Jitsu Academy

• Founded: 1925 by Carlos Gracie in Brazil; first U.S. academy established in 1978 by Rorion Gracie in Torrance, California

• Global reach: Over 150,000 online students in 196 countries

• U.S. locations: Approximately 100+

Gracie Jiu-Jitsu Academy focuses on a family-friendly approach to teaching BJJ, with specialized programs for different demographics.

Carlson Gracie Team

• Founded: 1970s by Carlson Gracie Sr.

• Global reach: 323 affiliated schools

• U.S. locations: Specific number not provided

The Carlson Gracie Team is known for producing successful fighters through exceptional coaching.

Alliance

• Founded: 1993 by Romero "Jacare" Cavalcanti, Fabio Gurgel, Alexandre Paiva, and Fernando Gurgel

• Global locations: Approximately 305 schools

• U.S. locations: Specific number not provided

Alliance is noted for its emphasis on competition and technical excellence.

Checkmat

• Founded: 2008 by Leo Vieira

• Global reach: Present in over 40 countries

• U.S. locations: Specific number not provided, but has a strong presence in the United States

Checkmat is recognized for its competitive success and has produced numerous world champions.

Overview

Naturally, we will eventually want to sanity check all this information. But it’s directionally correct.

So, one big takeaway confirms our understanding that this is a fragmented market. These are the largest franchises in the US, yet the big ones only operate 100 stores. 100 stores out of a market that has 10k stores results in a 1% market share…for the largest players…

Comparatively, it looks like there are roughly 40k gyms in the US. With Planet Fitness, the largest player, owning 2.6k gyms, that’s a 7% market share measured in store count. That 40k number might include not directly comparable gyms, so maybe the true market share figure is higher… who knows…

Most jiu jitsu gyms are owner-operated as a single location. When I say fragmented, I don’t mean a lot of 50-store franchises, I literally mean single-owned locations!

The other interesting thing is the brand value to business value of the current franchises. The franchises ‘only’ own ~100 stores, yet Alliance, 10^th Planet, Gracie University, Gracie Barra, are prominent brands in the jiu jitsu world. It doesn’t seem their store count has caught up to where it could be given the brand value.

Let’s put some rough numbers on the size of these franchises. Assume we’re looking at a franchise with 300 locations. Assume the gym produces $250k of revenue per year (~150 students at $140/month).

Without digging into the P&L, let’s imagine that rent and SG&A (i.e., labor) eat up a lot of the margin. So, call it 10-20% EBITDA margins. Assume 10% to be conservative.

Each gym therefore generates $25k of ebitda per year. With 300 gyms, the franchise (assuming all company owned stores), generates $7.5mm of EBITDA. System revenue would be $75mm. Assuming 7x EBITDA multiple, the business would be worth $53mm.

The likely reason that institutional capital isn’t in this market is that the unit economics imply that you must own a whole lot of stores to get any meaningful enterprise value. Plus, the TAM is relatively small, so it doesn’t attract any large funds.

$500mm business would be 20% of this market. At 10% margins, that would be a $50mm ebitda business. If each store produces $25k of ebitda, then this business would need to operate 2k stores. Simpler, 20% market share in terms of revenue can be applied to 20% of the 10k store count = 2k stores. Sure, this assumes a stagnant market and that the unit economics don’t improve.

Let’s also talk about the margins for a second. Traditional gyms can have EBITDA margins in the 40-50% range. Two obvious reasons that drive this are i) the franchise model and ii) the sleeping customer dynamic we discussed in the last post.

In our analysis, we assumed all the stores were company owned, meaning there is no high margin franchise fee that rolls up to the franchisor. Secondly, we’re back to this point of how the jiu jitsu model doesn’t have any sleeping customers.

But what if you can create sleeping customers within the jiu jitsu model? What if you can unlock a pool of demand that’s only available to the operators with scale? Let’s see how that could be possible and could unlock meaningful enterprise value to a scaled operator.

Scaled Jiu Jitsu Business

So far, what we’ve done is look at the market for jiu jitsu gyms. We’re trying to understand whether this is an attractive market from an investing standpoint. Specifically, if there is a roll-up opportunity in consolidating this fragmented market.

One big question is… what are the advantages to scale? Even, are there advantages to scale?

Let’s focus on that point now.

Here are some that we will go through

1.      Technology

2.      Marketing

3.      Expanding Demand Pool

4.      Back Office Support

Technology

A big determinant of these points boils down to the fact that most of these gyms are owner-operated as one location doing $250k of revenue. Across rent, salaries, insurance and utilities, there isn’t much cash flow left over to invest in technology, large marketing spend, etc.

For example, most jiu jitsu websites feel like huge marketing grabs to get your information and encourage you to sign up for a free class.

Once you’re a member, there’s a further lack of technology in the sense that there aren’t any apps to help you. I’ve recently been going to Life Time often, and the app is incredibly useful to reserve classes and browse new class options. BJJ gyms don’t have this.

Often, they post a schedule on their website and hand you a printed copy on your first day. If there are changes to class or cancellations, you’ll get an email. Technology is underinvested.

Think about a franchise with scale. If customers had the app, they could much more easily see what classes are offered that day and with which instructor. They could reserve a spot in those classes and that also lets the gym track attendance more easily. Students could even look for classes at nearby franchise gyms to explore new locations, meet new instructors, and expand their sense of community.

An app can even offer on-demand videos for at-home learning. Or notify students of open mats, new classes, seminars, etc. It would bring more value to the students, and this isn’t something that one-off gyms can afford.

Marketing

This one is more straightforward. With scale in students, a franchise can spread marketing costs over a larger number of customers. Brand recognition may help attract both students and instructors. There are not many national brands in jiu jitsu. The thesis here is that there is room to create national brand identity while retaining individual autonomy at the instructor level.

Expanding the Demand Pool

This is a big one. Anecdotally, people often must choose between a jiu jitsu membership and traditional gym membership. Traditional gyms can cost $100-$200+ and so can jiu jitsu memberships. This mutually exclusive dynamic prices many people out of jiu jitsu who otherwise would happily train.

So, you just lost someone who would otherwise happily sign up for your gym because they chose a traditional gym. No amount of marketing spend can change that. They know of your brand. You’ve already sold them on the allure of training. The only issue is they don’t want to give up a traditional gym membership.

Here’s the solution – with a scaled franchise, you go to a national gym operator and create a membership bundle. You, as the jiu jitsu franchise, have a pool of customers who might not have gym memberships because they chose jiu jitsu. But they’d like to workout in a regular sense in addition to training jiu jitsu.

You say to the gym, ‘hey, let’s create a bundle to wear my members can access your gyms, say, once a week for $X/month. In return, your gym members can attend one class per week for $Y/month. I have students who would like to workout on their off days, and you have gymgoers who would like to explore jiu jitsu but are priced out.’

And this is how you unlock a chunk of demand that is i) already interested in jiu jitsu and ii) limited in going to a fixed amount per week (so they won’t overcrowd your space but will still get a foot in the door).

The beauty is… this customer has already been ‘marketed’. Your marketing dollars have been spent. The limitation is not in their awareness or interest but in the cost and traditional gym alternative, which is a big alternative and big ask for them to give up.

Secondly, that they are limited in attendance means you get incremental revenue with limited risk of overcrowding. Even better, you’re getting potential new full jiu jitsu members in the door. Maybe a portion of these traditional gym ‘up-tiered’ members choose to purchase a full-priced bjj membership.

I’ll need to do work on this to accurately size this opportunity. But, for now, let’s make some assumptions to see where this starts.

Let’s take Life Time as an example. They have 1.5 million members (across 900k memberships). Side note, the average member visits a gym 12 times per month. That compares to Planet Fitness’ 3-4 visits/month. So Life Time has a much more engaged membership base… largely driven by the difference in membership rates compared to Planet Fitness’ cheap offering.

Anyway, let’s assume that 1% of Life Time memberships would consider this up-tiering option for access to jiu jitsu. The average membership fee at Life time appears to be $250/month doing some quick math using their last 6 months revenue per membership.

1% of their membership base means that 9k memberships would be interested in the option. Let’s assume you could charge an incremental $50/month for 1 class/week ($12.5/class is very cheap). That’s an additional $5.4mm of revenue. Yes, some of this value would be kicked-back to Life Time.

I also need to think more on this point – but this incremental revenue from the gym membership feels like it will be a higher margin than regular memberships. Maybe even 50%+ depending on how ‘sleepy’ the up-tiered memberships become.

That means a $5.4mm revenue opportunity translates to a $19mm enterprise value opportunity.

$5.4mm of revenue at 50% margins = $2.7mm of ebitda * 7x multiple = $19mm of incremental enterprise value.

What if we assume 5% of memberships would up-tier? That results in an additional $27mm of revenue opportunity (or $95mm of incremental enterprise value capture using the assumptions above…)

I don’t know what the right numbers are. There are arguments both ways and without having done the work, it’s difficult to pinpoint the appropriate assumptions. One argument is that this bundling will not only draw additional members to bjj gyms but also to Life Time. People may swap from competitor gyms paying similar rates to Life Time if this now gives them access to jiu jitsu in a more economical way.

There may even be a better way to structure this partnership. I need to work on it…

Here’s another thought.

We mentioned earlier that an attractive component of the traditional gym model is that they have many sleeping customers. Jiu jitsu doesn’t have this. But what if we can create sleeping customers within the jiu jitsu system? And what if only scaled operators can do this? That would be an enormous competitive advantage…

It would work like this. In the example above, there was clearly a gym-dominant or jiu jitsu-dominant customer who would up-tier for access to the other gym. In other words, the jiu jitsu student would pay $150/month for jiu jitsu and maybe $50/month for Life Time… if you broke the bundle apart.

Vice versa for the gymgoer. Maybe it’s $250/month for Life Time and an incremental $50/month for jiu jitsu. Maybe even the jiu jitsu up-tier is locked in for 6 months at sign-up… thereby giving some ‘sleepiness’ if they lose interest after 1 month.  

Anyways, this bundling could work.

Or maybe there’s simply an even-weight bundle. You choose a package that gives you equal access to both jiu jitsu and the traditional gym… and limits your visits to both. How’s it priced? Not sure…

But the point would be to create additional value for this customer by giving them access to both. Maybe they end up choosing one option more than the other… and the bundle is priced in a way that predicts this outcome and benefits accordingly.

Back Office Support

The last obvious scale advantage is back-office support. This sort of goes with the marketing point. But essentially you go the gym owners and say, ‘hey, you love jiu jitsu. You love to train students. You’ve built a wonderful business here. Let’s partner so I can help you manage the business side of owning a gym and that will let you focus more on your students.’

You then manage all of the ‘boring’ business aspects of owning a gym: leasing, payroll, taxes, utilities, insurance, financing, billing, marketing, etc.

The Belt System and Customer Stickiness

Let’s now change directions and talk about customer stickiness. There are a number of factors that generally promote customer stickiness and retention within jiu jitsu.

I think you rarely see students switch jiu jitsu gyms within the same city… they either quit outright or move cities and are forced to find a new gym. Here are the factors that contribute to this stickiness

• Sense of community and instructor loyalty – gyms generally do a great job creating a welcoming, family-like atmosphere. Students and the instructor form close relationships and this all encourages students to stay.

• Continual learning and the belt system – the belt system provides clear goals and milestones for students. It encourages continual learning and training to develop skills and advance through the ranks. Your promotions also come from a particular instructor… so you often stay with that instructor. Another fantastic feedback loop is rolling.

  • Rolling is the jiu jitsu term for sparring. Often, after a class, there may be a short open mat period where students and the instructors can roll. Effectively, you spar with one another and test your skills, try new moves, learn your weak spots.

  • Rolling creates a feedback loop because you directly see how good or bad you are. If you’re getting choked out, thrown in arm bars, etc., you won’t be happy, and you will be very motivated to train hard to get better and start holding your ground.

  • So, the belt system, at a high level, contributes to retention and frequent training but so does the feedback loop of rolling.

• Competitions – when starting jiu jitsu, a lot of students probably don’t think they would ever compete. But this sort of happens naturally. You start to get good. You are beating lots of people in your gym. And you want to fight a broader pool of people. So, think about competing. And this means you need to train hard and stay focused on practicing. That’s retention.

• Lifestyle – bjj feels more than simply a workout. Once people step into this ‘world’, they see that it’s just that. People who train bjj often eventually make it a core part of their lifestyle. It becomes a big chunk of their identity… and that is very sticky.

I’m not seeing very clear data on this, but it looks like retention is higher for jiu jitsu gyms than traditional gyms… for the reasons above. You can’t apply many of these factors to traditional gyms.

Here is a graphic detailing the belt system.

For adults, the ranking is white belt, blue, purple, brown, black. You can expect to spend 2-3 years at each level. It generally takes 10+ years to reach a black belt.

Some interesting stats I found

• 90% of students don’t make it to blue belt… so only 10% eventually earn a belt

  • Of this 10%, only 1% make it to black belt

• 8k-10k registered black belts with the IBJF

Conclusion

That concludes this post. We went in a variety of directions here. There’s a lot to work through, but hopefully this laid an outline for the potential in this market.

Thank you for reading.

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Until next time.

John Galt