We have a "former LGS" in town - 10 years ago, I could go in there and buy reloading supplies. I got out of it for a few years, and when I went back, he said, "Naw, I don't carry any of that stuff any more. You gotta carry way to much inventory to do any sales."
Well, other than archery, he isn't carrying too much inventory on anything any more - at least in the guns and hunting areas. And on the archery stuff, he's above MSRP by 20-25%. So now, I drive 43 miles to the nearest complete LGS - good new inventory, great used inventory in rifles, handguns, and shotguns, and a full line of reloading supplies including both new and used dies, presses, lead and melting equipment, etc.
His prices are pretty decent and the shop is always busy. In fact, 6 months ago I picked up a new Savage 7mmWSM he had on the rack for awhile. He showed me the new Kimber 7mm WSM, and sold me the Savage for $450. Do I mind paying a little more for powder or primers? -Heck no, because I can drive over in the morning, and load that night. Do I shop the big box stores? -No, because half the time if I ask for info about something on the rack, the person I'm talking to picks up the wrong "something," and knows nothing about it.
I do order from Midway, for stuff like muzzle reamers, sight pushers, etc. And I think they're a great outfit, too.
My point is, it's possible for a LGS to survive, and even to prosper. But it only works if they know their stuff, understand their customer base, and invest wisely in the inventory items that will make them a standout. Isn't that true of ALL businesses??