I think the issues with the LBS and where they fall down can be broken down into 3 areas:
Service
When you employ someone especially someone new to customer service it is hard for them to know what to do, especially if they are younger. I think management and or the owner needs to train up these "green" workers so they know the basic ideals of customer service, with such things as greetings, smiles, looking and acting professional, knowledge base etc. The owners need to look at how to motivate their workers to sell the shop and the products within the shop. Perhaps rather than just an hourly wage, they look at tips or more practically a lower base wage plus commission. It should go without saying but doing what you say you will, phone calls, emails, texts none of it is hard to do, a simple diary would work if it is busy, name blurb and phone number and someone can give them a call later?
As for the mechanics, the fundamental issue is they are not skilled (trade based), there is no minimum standard that they require to work on bikes and I doubt that if you had a trade-qualified mechanics that they would be working for so little money. The rent a tool system would be great and as long as it was cheap (sub $30) I think it would work, especially with things like facing of items and threading tools.
Stock
I always love to walk into a shop and touch, look and drool over all the nice bling, love being tempted to purchase something I shouldn't. I can understand the capital investment required to have that all sitting there and how it ties up the cash. I think the owners need to look at holding things on consignment if possible. Saving cash and shifting the cost onto the distributor rather than yourself. I like my LBS to have good stock of small items such as bolts, pads, tyres, tubes, cables and other bits. Older bike shops used to do this and I am unsure why they don't anymore. So many LBS do not hold good stock levels or are sold out when I turn up, they need a good inventory management system. I am also an impatient person, I want to be able to have the stock ASAP. They need to set up better systems with distributor to ship items there overnight. If I can get an item from UK or USA in 3-5 days, Australia should be 2 days tops.
Local development
I preferred to shop at TBSM because I knew they supported the scene, and actively encouraged ride days, their race day’s support, God knows I used their stuff at race days when I bent a pedal or shattered a rear mech. This investment into the scene is only going to help you, who isn't going to help a company out (by paying extra) when they help fund your local club? I think more LBS need to be looking outwards to see what they can do to promote cycling rather than just focusing on their bottom line.
In regards to the online v's LBS argument. The internet is never going away, if you don't adapt and work out a way to make money on how people operate you are doomed to fail. A LBS should charge a fee for fitting a non-store bought items, but offer free fitting (build the cost into the sale of the part) for store bought items. This needs to be the new business model if you are going to succeed in the internet era.