Craft supplies sell! Unique craft supplies sell even better. However, I do believe the key is selling what you are passionate about and educating yourself on what you sell. You have to become an expert in whatever you are selling.
I first started on Etsy with skip stitch blades and my self published crochet patterns. Because the blades are so unique they immediately drew traffic. So I thought to myself, "what other supplies do I use that are hard to get?" And I found more such as the Sharp Crochet hook. And I wrote patterns using these tools. Because these are so unique there are very few instructions/patterns.
I went after all the supplies that you could not get at the big box craft stores. Eventually I spread out to knitting supplies even though I don't knit. But it goes hand in hand with the other things I sell. So I had to research (and still do) and educate myself on knitting supplies.
I now offer some things that can be bought in a big box store; but only ones that are hard to get or go with another item. I in no way want to compete with Hobby Lobby or Micheals. I am going after the niche market.
So think about the tools you use or come up with a unique tool yourself. If there is something you use that you can't live without; and isn't easily found, chances are it will sell well on Etsy and Ebay.
A few months ago I needed some neon yarn. Hobby Lobby was the only store selling it and they ran out and had a bad shipment so they advised everyone nationwide it would be months before they got more in. So I hunted and hunted and found another supplier of neon yarn. Put it in my Etsy shop and it sold like hotcakes. Still does. In fact I am out of it right now.
Always be on the lookout and observe what is going on in your own industry!