Most categories on Etsy are saturated...we can't escape this. The thing about knits and crochet is that each piece is unique...no one can do the exact same as you, there are so many variations and takes on things. I do have similar items to other shops, what I do to make them stand out is I try my best to take good photos, good backgrounds, and work on my brand, and getting found. I try to put a lot of 'me' into what I do. Put your personal touch on it, and remember why you set up shop to begin with! :)
I would also be careful with licensed characters such as Sanrio, Disney...