"Ultimately all physical retails spaces have the same common problem -- why should someone go into your store when they can get the same products online. ...I personally think there are two answer, one is to move the core retail business online, and the other is to create experiences people will keep coming back for."

This is a great observation. I think that every business looking at option 1 would run away in terror, as that would mean competing directly with Amazon. My local bookstores have pursued this to some degree out of necessity in covid times, but it doesn't seem sustainable, and I never got the impression that they prioritized it.

The bookstores local to me that have thrived have pursued the latter strategy with events, but primarily by having an opinionated selection that is a joy to browse. Amazon cannot compete on this for two reasons:

First, they cannot have a uniquely opinionated selection. They can have an "Amazon" selection, which will by its nature be the lower common denominator, or they can have a "personalized" selection, which will by its nature play to the customer's pre-existing interests and the generic global recommendation insights from Amazon's ML models. People do have lists on Amazon, but this isn't a profitmaking endeavour worth a full time commitment. No single perspective will be rich enough to engross the consumer for more than a minute or two, or call them to return regularly.

Second is that Amazon does not provide the physical experience of browsing physical books.

As you said, this still leaves the problem: even given all the above, why wouldn't someone just browse the in person bookstore and buy the books online? Thankfully, the survival of these stores shows that there enough buyers are "non-rational" to financially support the experiences they enjoy.