What does this mean?

[Anarcho-Brocialist]

"The lower strata of the middle class... sink gradually into the proletariat, partly because their diminutive capital... is swamped in the competition with the large capitalists, partly their specialised skill is rendered worthless by new methods of production". (Karl Marx & Friedrich Engels: 'Manifesto of the Communist Party' in: Karl Marx: 'Selected Works', Volume 1; London; 1943; p. 213).

[bricolage]

here's the full quote, that might help,

The lower strata of the middle class — the small tradespeople, shopkeepers, and retired tradesmen generally, the handicraftsmen and peasants — all these sink gradually into the proletariat, partly because their diminutive capital does not suffice for the scale on which Modern Industry is carried on, and is swamped in the competition with the large capitalists, partly because their specialised skill is rendered worthless by new methods of production. Thus the proletariat is recruited from all classes of the population.

[Jimmie Higgins]

It sounds like he's describing how there are grey-areas in the capitalist class structure, but that people are pulled towards one or the other pole (workers or capitalist).

With industrialization the artisans and small shop keepers were hit with this sort of pressure. The concentration of capital at this time meant that small shops were put under by larger-scale manufacturing (competition); the artisan craftsman and apprentices were replaced with industrial de-skilled labor (new production methods) - production that used to happen in dozens of independant shops was now being concentrated in large mills and factories.

So during this time, the little fish that did not succeed in eating their neighboring fish and becoming a big fish, were then eaten by the ones that did become big fish. The big capitalists put many of the small capitalists out of the market and towards the proletariat.