I've looked into opening a yarn shop. And I have to say that when looking at LYS vs online to do business, online wins hands down. Overhead on a LYS can be spendy, it is very tiring, espeically if you are the owner and main worker. You have to keep up with local trends, stock so much of so much, have minimums with many yarn suppliers that you have to meet (either per order or per period (quarterly, annually, etc.)) There is just so much to do. Plus you have to compete with online sales. While some people want instant gratification with shopping, there are others who are just as happy to read a review, accept it and purchase at a discount online (or they can be evil like me and go feel the yarn at a LYS and then go order it online because I know I can get it 25+% cheaper even with shipping )
In all honesty I think the only reason that my LYS stays in business is because it is connected to a sewing and vaccuum repair shop which does booming business. The yarn portion of the store is small and I don't see inventory moving very well. I've toyed with opening my own shop (after I rob a bank) but it would be rather expensive. But maybe with the right storefront and the right location and the right customer service it could be profitable.