First, the good news: This year the retail industry can expect to post its biggest sales gain since 2000. Standard & Poor’s predicts that sales of general merchandise, apparel, furniture, and other goods excluding cars and food will rise by 5.9% this year, surpassing 2003’s estimated 3.9%.

The not so great news? The rising demand won’t lift all retailers equally. Luxury and value priced stores will fare best, while midprice retailers such as department store chains will continue to get squeezed. Home related stores should also have a strong year. But all retailers from apparel purveyors to electronics chains are fighting to be noticed in a landscape packed with too many stores, while growing online channels siphon away more spending. It all adds up to continued cutthroat competition. “Most public retail companies are desperate for growth” says Millard S. Drexler, chief executive of apparel retailer J. Crew Group and former head of Gap Inc.

Nowhere is that hunger greater than among the overcrowded midprice tier of retailers that sell a high concentration of apparel. The ongoing shift toward casual clothing only heightens the competition because many chains sell similar goods, from jeans to khakis. That includes department store chains such as Sears Roebuck, May Department Stores, and Dillard’s, as well as department store hybrid Kohl’s all of which are suffering weakened outlooks. Also slipping are some specialty clothing retailers, including American Eagle Outfitters, Abercrombie & Fitch, J. Jill Group, Talbots, and Charming Shoppes. Merrill Lynch & Co. forecasts that the major department stores in 2004 will post a 2.3% increase in sales at locations open at least a year.

The assault is coming from below and above. On the value end, mass discounters Wal-Mart Stores and Target, off price chains such as TJX and Ross Stores, the Old Navy division of Gap, and warehouse clubs like Costco Wholesale continue to gain market share. Moreover, Wal-Mart and Target are significantly boosting the quality and style of their products. Dowdy Wal-Mart has rolled out a stylish line of women’s career clothing under its “George” label. Merrill Lynch expects that sales by mass discounters will grow by 3.6% in 2004 and wholesale clubs will see a 5.3% uptick.

Midprice retailers also are feeling the pressure from above. Luxury counterparts, such as Neiman Marcus Group, Nordstrom, and Saks Fifth Avenue, all rely on better service to sell more distinctive, higher margin goods. Merrill Lynch thinks luxury sales will lead the retail growth race, with a 6.1% surge.

Many midmarket retailers are trying to break out of the pack by enriching their offerings with better, more distinctive stuff. May’s Lord & Taylor unit, Brooks Brothers, and Federated Department Stores, which operates Macy’s and Bloomingdale’s, are among those adding higher quality private label clothes. Federated is trying to land or extend exclusive deals with brands like H, a fancier apparel line from Tommy Hilfiger launching this spring to which Federated will have sole rights for a year. “With a reputation like Macy’s, you don’t need to slug it out on price,” says Stuart M. Goldblatt, senior vice president at Federated Merchandising Group.

One problem is that there are too many stores, both real and online. The situation will worsen this year. After slowing for three years, growth in new retail square footage jumped by 9% in 2003, estimates F.W. Dodge chief economist Robert A. Murray. “That strength will continue into 2004.” While new storefronts are slicing the retail pie thinner, online retail is taking a bigger share, too. Cambridge (Mass.) based Forrester Research Inc. forecasts that e-commerce sales will rise by 28% in 2004 from a year earlier, to $122.6 billion. That will work out to 5.6% of overall retail sales, up from 4.5% in 2003.

The two largest sellers of merchandise on the Internet, eBay Inc. and Amazon.com Inc., continue to expand by offering broader assortments of goods. Both now are selling apparel, putting yet more pressure on bricks and mortar clothing retailers. Bluefly Inc. and Blue Nile Inc. have also shown there is room online for focused sellers of luxury goods. But some analysts question how far Amazon can expand into new product categories. “It risks brand dilution and confusion,” says Forrester senior analyst Carrie A. Johnson.