There were opportunities for the group to increase its ''wallet share'' across all categories by focusing on consumers with high disposable incomes.
The company was achieving that through a programme focusing on stocking more international brands, speeding up own-label product development and improving customer satisfaction through better product presentation.
''There is a notion among shoppers The Warehouse Group, although cheap, does not offer high-quality products. Management would do well to dispel that notion.''
Morningstar believes the integration of Noel Leeming would result in some ''reputable premium brands'' moving across to the group's Red Shed stores over time.
More people could be enticed into the Red Shed stores, improving the brand perception.
The Warehouse did not have an economic advantage, the note said.
The company stood apart in the New Zealand retail sector because of its sheer size and it had unprecedented scale from which it could leverage its brand.
It had a total retail trading area of about 650,000sqm, four times the size of rival Briscoe Group, the note said.
However, The Warehouse's brands were easily replicated, with low barriers to entry, and had failed to resonate with consumers in the past three years.
Discount department store and electronic retailing were highly competitive and price competition was a major factor in determining sales.
Price competition had led to margin pressures and operating margins had fallen by more than a half, from 7.4% in 2010 to 3.6% in 2017.
''The Warehouse's offering is not differentiated enough to justify selling products at a premium retail range.''
The group competed on a global stage and had the disadvantage of servicing a small domestic population of fewer than fivemillion, compared with those from the United States servicing more than 320million.
Online retailers operated within an environment of very low operating costs. Technology provided a 12-hour shop front and there was no need for expensive shop leases or selling staff.
The lower operating cost enabled those new market entrants to deliver products
at a compelling price, Morningstar said.
The board was under no illusions about the performance of the business and the group's overall underperformance in the non-food retail sector as a result of poor execution.
Management was determined to turn around the franchise by positioning The Warehouse as the ''House of Bargains'' and the ''Home of Essentials'' for shoppers, the research note said.
''We think management's strategy is gaining traction, which is substantiated by recent advancements. However, it remains to be seen whether the momentum is sustainable.''
Online shopping continues to threaten all retailers and The Warehouse was no different, Morningstar said.
