Another problem is that sometimes small shops don't realize they need to compete on quality and service, as it's the only advantages they have in their favor. Not all, not even most, but too large a percentage just try to enact protectionism (ban the big box stores from our neighborhood, zoning laws, et al) without trying to compete on merit alone.
If they're a niche market, they can definitely compete on some things if they're wise. Gun stores come to mind. A lot of dusty-overpriced-guns places fuss that Wal-Mart is putting them out of business, but they're putting themselves out of business. One I know of, besides lots of classics and milsurps, seems to have gotten import contracts for some guns and ammo. They move a lot of Saigas as well as new import ammo, the latter for cheaper than Wal-Mart's ammo. It brings people in the door. They realize that people have access to the web, so they don't price things higher than you can find them on the web.
And a lot of people will still pay a little more if they recieve prompt and attentive service in any sort of store. It's when someone goes in a small store and recieves the same bored indifference as a big box that they see no reason to return to it.