I think there'll always be a place for the FLGS. And I think the solution to massive discounters is for FLGSs to find a new way to serve customers. To be more than a retailer, since the FLGS can't compete on price.
A FLGS can't compete with a discounter on price because a FLGS can't get volume discounting from the distributor.
A FLGS can't compete with an online store on selection because a FLGS has limited shelf space, and can't come close to stocking the millions--
millions--of items that an online store can stock.
But a FLGS
can compete with discounters on customer interaction because a mass-discounter dirt store employs unskilled, uninterested labor and a mass-discounter Internet store has no person-to-person interaction at all.
A FLGS
can compete with discounters on service because Walmart and online stores don't have gaming areas or tournaments.
If I ran a FLGS, I'd focus less on price and more on service. At a minimum, I'd have:
A super-clean, super-organized store that doesn't smell like an armpit.
Decent tables and chairs (more than the super-cheap folding chairs and card tables you usually see) for customers to play.
A loyalty program (like a punch card; buy 10 things get 50% off the 11th thing).
I'd sell vending-machine food and drinks to the gamers in my store (recouping the cost of the retail space given over to gaming tables).
I'd offer bounties on shoplifters.

I'd cater to parents and kids in the daytime and afternoon--since parents aren't savvy enough to know about Internet sources and kids don't have credit cards, these are my core customers.
I'd charge full retail price for most books but offer discounts to gaming groups that play at my place at least once a month--this encourages gaming groups to game at my store, which means traffic, high-margin and high-volume food and drink sales.
In fact, I'd make my FLGS a Starbucks of gaming. A place to go and grab a latte while also getting your game fix. It'd be lit like a coffee shop, with classy design like a coffee shop. Borders and Barnes & Noble made a killing when they added coffee to their book stores; I'd do the same for my FLGS. And, for the little kids, I'd have soft drinks and juices.
Point is: the days of the old-school game shop are over. Old school shops--dirty, unkempt, with picked-over product spilling onto the floor and a smell like used socks--could only exist because they were the only source of product for a niche customer. With the Internet, all product is freely available to everyone in the world--at a discount. To survive, a FLGS must be more than just a place to find product that's available elsewhere at a much lower price. A FLGS must offer something unique, like a place where people who enjoy this niche hobby can hang out in comfort and--dare I say it--style.
That's what I wish my town had. The only game stores I've seen in Seattle are old-school: smelly, dingy, run by socially-challenged guys who don't want to talk to anyone who can't describe the threat range of all martial weapons. These places scare away newbie gamers, annoy savvy gamers who can get better prices online, and parents are afraid to leave their kids alone inside. They may as well have a sign that says "Scary Game Shoppe: we have a very limited selection of game stuff, priced higher than what you can find online, and it's poorly organized! No newbs allowed."
My dream store: "The Game Den". The place is decked out old-world English style, like a pub, complete with big beams, whitewash, and brick. Big windows let in natural light and fresh air, revealing tables of folks relaxing, drinking coffee, reading gaming magazines, or card gaming. Walking inside, the place is decked out in cool earth tones and stylishly lit with recessed lighting and occassional mini spotlights. The interior looks like it could be a man-size version of Bag End or something out of Harry Potter. Behind a bar--an actual bar, complete with brass trim--is a young, attractive, smiling barrista. A few shoulder-high racks of gaming stuff seperate the bar area from the back gaming area. This is where the Warhammer tables, card tables, and other tournament tables reside--the lighting is brighter here. Bookshelves (wood, not cheap metal) line the walls. A couple computer terminals offer online access to customers; competitor websites are barred but there are prominant links to ENWorld, the SRD, and other resources. I've gotten in touch with Wizards, the RPGA, Wizkids, and my distributor and let them know that I'm set up for and eager to do promotional release events and tournaments. I work with my customers in setting up local events and parties. I work with local schools to let them know I and my store are available for classes and workshops. I set up customer events for Matrix, LotR, Star Wars, Harry Potter, and other geek fests. Event dates are clearly marked on a clean, professionaly-printed poster--classy handouts are available to take home. I make my money primarily from drink sales and high-volume collectable games, secondarily from book sales and tournament fees. My target customers are young gamers (grade school-college) who don't have a house of their own for games, and have a real need to socialize with like-minded peers.
I'd love a store like that. As an adult, eh, I'd rather game at home and buy online, but as a kid--oh yeah, that place would be heaven.
-z, hoping someone steals these ideas