I don't normally chime in too much to, but Dan's post has got the old synapse firing.
I got into this hobby in 1986 and became friendly with a fella named Roger Bull in Tucson. If you don't know Roger, he was the guy who monopolized on the "Turbo Grazer" snail and setup a store called Saltwater Solutions. I actually helped him with some of that and was one of his first guys who packaged and shipped those snails all over the world. Roger would also fly to the Los Angeles area to handpick fish and coral stock from the big importers for the local stores in Tucson. Through his connections and over time he expanded his business to supply not only the snails, but fish and coral livestock through his own store. He did very well, very fast. Roger put a considerable amount of $$ and effort into the life support systems within his store which made him a viable contender against any store in Phoenix. The designs made it easy to care for and maintain his livestock which naturally helps create an environment people want to trust and buy from. In time he began to expand, and in my opinion, that is where things started going downhill (he also had some legal issues I don't want to go into here and is not the point).
I agree with Phenom5 in that stocking a bunch of equipment is a losing battle. Online sales will generally smoke any price a local store can compete with. Maybe the proposed Internet Sales Tax may level some of that, but I doubt it. Overnight shipping costs on livestock are painful and probably the best advantage a LFS has in the competition as long as their prices are not exorbitant.
Also, having a showroom full of tanks, skimmers, sumps and equipment are likely not going to sale. They take up too much space that could be better utilized for quality livestock display tanks. Most of the individuals that will support a real reef and saltwater store have already been in the hobby awhile, know the equipment they want, its cost online, or hell, already own it. They go to the store to see what's available in livestock, not check out the latest Bubble King, Deltec or LED lighting system (although good quality technologies should be used in the store and can be seen by customers). By all means, have a direct link for equipment (2 of the largest aquaria wholesalers are in Phoenix) for those who DO want to buy through the LFS, just don't stock it until needed.
Day-to-day needs I feel are critical. I can't remember the last time I was able to walk into a LFS and get a quality portion of brine shrimp. In the late '80s and early '90s, almost any of the stores could provide this (Tropical Kingdom, Tropical Gardens, Great Barrier Reef, heck, even Petco). Certain times of year are tougher than others, but still, something. Also, stock good quality frozen foods from the best sources, not just the biggest names on the block.
Supplements, additives, limited medicinal products and maybe salt(s) should be kept on hand. Salt is tough being F&S has such a good deal on price, shipping & at the present, no tax.
Lastly, difficult to find hardware such as the plumbing supplies that are used in the hobby. Don't carry what can be obtained from Home Depot, Lowe's, Ace Hardware or other local building supply stores. Their prices will generally beat anything the LFS can provide. Target the tough stuff that is used and required on a regular basis, i.e. bulk heads, quick connect-disconnect fittings, certain valves, and unique devices that make maintaining a system easier and better.
Bottom line, limit the offerings, but be the very best at what you offer.