Most LBS's I visit will give 10% off if you are a regular anyway so they are probably not losing that much more than they would anyway.
They must be benefiting from the scheme bigtime, I have two bikes that I wouldnt have bought with out it, well I might have but they would each have only cost half as much 🙂 And there are thousands of people who wouldn't be on a bike if it wasn't for the fact that they were getting something back from Gordon! Theres also the knock on from the sale with repairs & spares upgrades etc. My LBS loves it!
As Mike says, the scheme is run as a business, not actually by the Government so the money has to come from somewhere. I run the scheme for my employees and we just sort it out ourselves, its not exactly rocket science for a book keeper!