I am thinking that, if you want to make a million bucks in the LHBS business, start with two million. Like with other businesses, on-line operations can lower the price because they buy in bulk, drop ship from the manufacturer, don't have a storefront and other overhead etc. That said, we buy from the more expensive guy down the street because he, or she, is there and is a person. That is both a blessing and a potential problem.
When I started to brew, I spent one day and hit every LHBS in my area. I drove about 150 miles by the end of the day but it was a great education. I have a deep background in retail so I was looking for some of the things people talked about here, well stocked, clean, user friendly, unintimidating to the rookie, etc. Most of all, it was the people, the people, the people. In a couple of shops, I was made to feel like I was not welcome. Staff were either jerks or ignored me. In another, I got the heavy lecture and the push to the expensive stuff. In each shop, I told them I had a Mr. Beer kit working at home and in all but two, I was looked at as if I was a bug.
I settled on a shop that was close enough to home to get there for the little stuff. Most importantly, I settled on that shop because the owner walked up to be and shook my hand and said "Hi, I'm Eric". He told me about the monthly demos, the shop's brew club, walked me around the shop and showed me where things were and didn't treat me like crap when I thanked him and left empty handed. A week later, I attended a demo at his shop and walked out with a complete kit. I still buy on-line when I see the occasional great deal that I know he can't match but, I try to get in and support his shop and let him know that his success is important to me and my success.