I got my Soma from one. People donate their bikes and the mechanics fix em up and sell them to raise money. The nonprofit aspect is like people are describing, donating bikes to kids on the condition that the kid actually helps fix it up (pretty cool idea), allowing people to use the workshop and get advice for a small fee, selling used parts for next to nothing. And my Soma is a pretty nice bike I got for a very fair price when the stores had pretty much no bikes.
There really aren't any used bike stores around here, and I don't think the LBS see the coop as competition. As a matter of fact, one of them donates to the coop. I think the real competition is with Walmart. The coop is giving away nicer bikes to kids than Walmart sells.