Zacks Small Cap Research – SWSSF: Benefitting From Rising Demand for Decaffeinated Coffee & Natural Beverages, Initiating Coverage – Technologist

By M. Marin

OTC:SWSSF | TSX:SWP.TO

READ THE FULL SWSSF RESEARCH REPORT

Rising Consumption of ‘Decaf’ and Company’s Natural Decaffeination Process Important Growth Drivers…

British Columbia-based Swiss Water Decaffeinated Coffee Inc. (OTC:SWSSF) (TSX:SWP.TO) is a leading specialty coffee company and premium green coffee decaffeinator focused on producing chemical-free decaffeinated coffee. The company’s proprietary Swiss Water® Process is a chemical-free coffee decaffeination process that is certified organic by the Organic Crop Improvement Association.

Swiss Water Process 100% natural…

The company is poised to benefit from several factors, we believe, including rising consumption of decaffeinated coffee and the growing consumer trend towards natural and more healthful food and beverages (F&B), as Swiss Water’s proprietary decaffeination process is 100% chemical-free. The company also uses fresh water from British Columbia’s coastal mountains. Importantly, at the same time, the process is designed to maintain the full flavor of the green coffee beans. In a report on the market for decaffeinated coffee, U.C. Davis notes that the Swiss Water method includes the benefit of flavor retention.

As the decaffeinated segment grows, we anticipate ongoing growth for Swiss Water reflecting multiple trends discussed below, including:

▪ Rising consumer trends towards healthier food and beverage choices

▪ Grassroots and other initiatives to shift to natural decaffeination process

▪ Growing decaffeination choices in the premium coffee segment

▪ Consumers managing caffeine intake while maintaining coffee consumption

… Meeting growing demand: production facility upgrade, expansion…

To upgrade and expand production capacity, Swiss Water opened a new state-of-the-art production facility in the city of Delta, British Columbia in 2020 and, reflecting growing demand and the need to increase capacity, installed a second production line in the facility in 2023. The consolidation of operations in one location has enabled Swiss Water to obtain some production efficiencies. In addition, the proximity of the facility to its warehouse operations also has led to some operational benefits.

Swiss Water, Decaffeinated Coffee Key Markets

We believe the company’s growth strategy has a positive tailwind from coffee consumption trends in key markets: North America and Europe. For example, currently only roughly 15% of coffee consumed in the U.S. is decaffeinated, and decaffeinated coffee represents about 12% of all cups consumed in Western Europe, according to the NCA, but decaffeinated coffee is gaining market share. We believe this implies substantial growth prospects for Swiss Water, as sales of decaffeinated coffee is expected to continue to increase.

The U.S. does not rank #1 based on per capita coffee consumption, but it is the largest market for coffee consumption in the world, according to data from World Population Review, reflecting the size of the population combined with per capita coffee consumption trends. On a per capita basis, all but one of the top ten coffee consumption markets are in Europe, implying – we believe – strong opportunities for decaffeinated coffee consumption.

Given the consumption of coffee in North America and in many European markets on a per capita basis, we believe there are opportunities for Swiss Water if, as we believe likely, decaffeinated coffee continues gaining share and as consumers increasingly focus on consuming natural and organic foods and beverages.

Regulatory & grassroots pushback to the use of chemicals in the decaffeination process

We believe that rising awareness about the use of solvents in some coffee decaffeination processes, combined with growing interest in consuming natural foods and beverages, could be likely growth drivers for Swiss Water’s natural decaffeination process. In fact, overall global capacity appears to be moving toward less chemical solvent based methods, reflecting consumers’ growing health preferences. According to a study from U.C. Davis, “Solvent-based methods are still the most prevalent method due to their low cost and ease of use. [However,] Swiss water decaffeination is increasing in popularity…”

Moreover, there have been regulatory and grassroots efforts to limit the use of chemicals in the decaffeination process. In March 2024, California considered a proposal to ban decaffeinated coffee using methylene chloride or to require that coffee be labeled as such for improved consumer transparency. In addition, the FDA has been petitioned to ban four toxic chemicals in food uses, including in many decaffeination processes.

Growing trend towards healthy food and beverage (F&B), premium coffee choices, expansion of decaffeinated coffee category likely growth drivers for Swiss Water

The decaffeinated segment is gaining share within the overall coffee category, as indicated. According to consumer research from StudyLogic, the amount of decaffeinated coffee consumed has grown annually since 2017 in both the U.S. and Western Europe. At the same time, the growing trend among consumers across the globe to seek out healthy food and beverage (F&B) choices, combined with the ongoing expansion of the decaffeinated coffee category, presents potential growth opportunities for Swiss Water, in our view. The company believes that its natural decaffeinated process is an important factor that differentiates the Swiss Water process and makes the company increasingly relevant and in demand within the decaffeinated coffee category.

The trend toward healthier and natural F&B can be seen in the coffee choices consumers make, a trend that is also consistent with the growing popularity of organic and natural food options. Demand for organic coffee continues to rise. In fact, 39% of consumers indicate that they are more likely to purchase coffee that is certified organic, and 59% are more likely to purchase coffee if it is grown in an environmentally sustainable way. According to Coffee Intelligence, the 2021 global organic market was valued at $133 billion, which represented a 24.6% year-over-year advance. Demand for organic coffee is highest in North America, followed by Germany and France.

Increased focus on natural and premium decaf category help drive growth

At the same time, decaffeinated coffee continues to play a role in the growing ‘specialty coffee’ category, which gives consumers more choices within the premium coffee segment. A growing focus on specialty decaffeinated coffee – or premiumization – is an important factor contributing to the expansion of the decaf category and Swiss Water’s strategic focus is largely on the premium specialty coffee segment. A recent NCA study indicates that 41% of U.S. consumers responded that they had enjoyed a specialty coffee “in the past day.” In our view, these trends bode well for Swiss Water Decaffeinated Coffee’s continued growth.

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