Six months ago retailers and analysts believed that by June 2008 the worst of the current economic cycle would be over - interest rates would have peaked and consumer debt and inflation would have been brought under control. How wrong they were. They did not factor in a "perfect storm" of negative variables that have turned this into the toughest cycle that retail veterans like Pick n Pay's Raymond Ackerman and the JD Group's David Sussman have seen in decades.

Among the factors retarding retail sales is consumer indebtedness. Today a full 12% of disposable income is spent servicing debt, compared with 7% at the start of 2006. "This is historically high," says Stanlib economist Kevin Lings. Though the average wage increase was 7,8% in the first quarter of 2008, headline inflation is about 11%. "We have reached the point where consumers are deciding who not to pay - and bad debt judgments will inevitably increase."

When the slowdown finally hit the retailers - last December, a full 18 months after the first interest rate hike - it was sudden and dramatic. Sales growth plummeted to negative levels in March this year. Many retailers and analysts also did not foresee the effect that commodity prices - from oil and steel to wheat and edible oils - would have on inflation.

Typically, in cycles like these, the food retailers - defensive stocks - fare better than credit retailers like the furniture and apparel companies, and other cash retailers selling durable and semidurable items.

Shoprite, which was the best performing retail share last year, looks set to repeat that performance. Trading at around R42,30, the share is close to its 12-month high of R46,25 and well off last July's trough of R29,86. It is the only retail share to beat the Alsi over the past year. "Solid performance as well as the Africa story has captured the public's imagination," says BoE equity analyst Barbara Price-Hughes.

"Most of our customers are concerned with employment - not interest rates," Shoprite CEO Whitey Basson said at the time. He may be right. But while the lower-income consumer is not crippled by as much debt as middle-income shoppers, other rising costs are forcing them to confine their shopping to the bare basics.

Spar, too, has fared relatively well, reporting revenue up 21,1% at R13bn and operating profit up 24,8% to R496m for the six months to March. The group is reaping the benefits of investment in centralised distribution centres, its store remodelling programme, new store openings and aggressive marketing.

The one anomaly in this retail basket is Pick n Pay (PnP), which has underperformed on expectations. "Pick n Pay has dealt with a number of internal issues this year," says Price-Hughes.

These include the repositioning of the underperforming Score supermarkets, conversion to central distribution, the store rebranding, an extensive SAP implementation and the underperforming Franklins operation in Australia which, she says, must be distracting management attention.

To compound its misery, not only has PnP lost market share to Woolworths, Shoprite and Spar, but its competitors (Shoprite and Spar) have opened up their gross margins, while PnP's declined. "This is unusual, it's difficult for those ranked two and three by market share to open up margins against the market leader," Price-Hughes says.

Woolworths, with its unique blend of food, clothing and lifestyle merchandise, had mixed fortunes. In February CEO Simon Susman confessed that the company was late to react to the slowdown. Still gearing for growth, Woolies' executives did not heed the warning signs - such as the slowdown in vehicle sales. Management did not earn bonuses last year as the company hastily reined in expenses and retuned its product mix. Bad debts also began to climb - 30% of Woolworths sales are on credit - and management must have heaved a sigh of relief when it sold 50,1% of the financial services business to Absa.

The National Credit Act (NCA) "changed the whole way that credit was granted," says Allan Gray portfolio manager Delphine Govender. "But we were heading for slower growth anyway - for companies to be earning 60% above long-term ROE [as they were in 2006] is simply not sustainable. You could argue that the NCA was one of the best things to happen. It forced a slowdown in credit-related spending."

But this was too late for Ellerines (acquired by African Bank and delisted this year), the JD Group and Lewis Stores. They are facing flat turnover growth and escalating bad debts. Without internal problems to distract it, Lewis is focused on its market and this year implemented a marketing system that woos its best paying customers with extended terms and special offers.

By contrast, its cowboy cousin, the JD Group, whose interim results to February were awful, has seemed consumed by internal activities. But executive chairman David Sussman (the first retailer to spot the turning consumer cycle) and CEO designate Grattan Kirk could prove to be a formidable team.

Of the apparel retailers, Truworths has consistently outperformed rivals such as Foschini and Mr Price. But in what is certainly a reflection of the times, Truworths' sales are slowing: 16 weeks into the 47 weeks of this financial year (year-end is June), group retail sales had increased by 12,2% on inflation of 6%. But further into the period, sales dropped sharply to 10% and more recently to 8,7% and 6,7%.

By comparison, in its year to March, the apparel division of the Mr Price Group grew comparable sales by 16,2%. "We are growing faster than the market, which suggests that we are taking market share from our competitors," says group CEO Alastair McArthur. "We are able to weather these tougher conditions because of our appeal as a value retailer and Mr Price's predominantly cash formula."

"There is risk in apparel," adds Govender. "There is not much room for internal issues - retailers cannot afford excessive markdowns and unneccessary stock on their books. They cannot afford to make buying errors. That is why operating margins are declining. They are not as cheap as they look."

Broadline retailer New Clicks is one dark horse in the retail mix. Dogged by internal problems and its early bet on bringing pharmacies into the drug store, the company did not see much upside from the consumer boom of the past four years. But with new management and a business plan that is finally bedded down, it is a turnaround story with potential. "I'd bet that over the next five years it will be the drugstore in the country. Its business model will ultimately prevail," says Govender.

With its high-volume, low-margin business model, Massmart is shielded from the worst of the downturn (and the best of the upturn).

While CBW (the food wholesaler) and Makro performed well last year, sales of general merchandise at Game were softening, as were the DIY component of sales at Builders Warehouse.

For players in this sector the next year will be tough. "Sales will be lower while cost-push pressures - wages and leases - must increase. This will put pressure on operating margins," says Govender.

"The greatest risk for retailers and for investors is that interest rates have not yet peaked and there is no indication of when that peak will come," says Price-Hughes.