(FORTUNE Magazine) – IF BUYING a new car gives you about as much pleasure as scheduling a root canal, take heart. Computer technology, modern merchandising, and old-fashioned entrepreneurial spirit are about to put traditional car dealers--among the most hated business people in America--on the endangered species list. Already about one in ten buyers has discovered how to bypass the dealer. They get their cars through warehouse clubs, credit unions, affinity buying groups, and other third parties who do the dirty work for them. Or they go to auto superstores that sell at a fixed price, offer money-back guarantees, and don't pressure customers. Still others shop for a car--and actually make a purchase--with a computer (see box). The information superhighway, it turns out, goes right past a car dealership.

A long-overdue revolution in auto retailing has arrived. Years after Wal-Mart upended general merchandise retailing and Home Depot annihilated the local hardware store, the auto industry is joining the modern age. Says J.D. Power III, founder of the consulting company that bears his name: "Car dealers may go the way of other local retailers in groceries, home appliances, travel, and a host of other businesses." Nearly everyone will benefit. New distribution channels mean that manufacturers will become more efficient and more adept at pleasing their customers. Customers will get the cars they want faster, with less hassle. Surviving dealers will be able to do business like normal merchants rather than like sharks fighting over the same piece of flesh.

The shark analogy is appropriate. Auto dealers are shrewd, resilient businessmen who have survived in a highly competitive industry without evolving much. But they have subsisted on substandard margins for years, and the world around them is shifting fast. Says industry expert J. Ferron of Coopers & Lybrand Consulting: "If a dealer doesn't have an exit strategy or an ability to change, he's in deep trouble."

The corpses of dead dealers are already beginning to wash up; their numbers have fallen from 30,800 in 1970 to 22,800 today, despite all the new franchises awarded by Japanese and Korean automakers. Stately Mercedes-Benz has thinned its dealer ranks from 425 to 345 over the past eight years. Chrysler, which had some 5,400 dealers in 1990, is shrinking to 4,000 as it consolidates its Chrysler-Plymouth and Jeep/Eagle franchises. General Motors has budgeted up to $2 billion to reduce its dealer count from 8,500 to 7,000. Oldsmobile alone is cutting its dealer body by up to 40% in belated recognition of a precipitous drop in sales volume, from 1.2 million in 1986 to under 400,000 last year.

Considering the money at stake, it is astounding that car distribution didn't change sooner. Auto retailing is a $500-billion-a-year business. Franchised dealers (those associated with a manufacturer) sell about 15 million new vehicles and 13 million used ones annually. Private transactions between individuals and independent dealers operating out of "shade tree" used-car lots account for roughly 15 million more used-car sales each year. A huge pot of money awaits anyone who can add value and wring costs out of the system. According to MIT's Martin Anderson, a member of the International Motor Vehicle Program, the money spent by manufacturers and dealers to market, distribute, and sell a car accounts for up to one third of its retail price--about $6,700 for a typical $20,000 car. That compares to labor costs of $1,175 to assemble the same vehicle.

For legal reasons, you will always need a franchised dealer to process your paperwork and officially take delivery of a new car from the manufacturer. But it's possible to shop, select, and pay for your car without ever setting foot in a dealer's showroom. Consider these possibilities:

THIRD PARTIES. Anyone who can help you buy a car qualifies as a third party: a discount club like Sam's or PriceCostco, a credit union, a broker, or an affinity group like USAA, which buys cars for retired military personnel. J.D. Power's Donald Keithley says third parties account for 13% of all sales in California. Though the level of service varies, a third party can help you choose a model and select the options, find out the wholesale price or dealer cost of the entire package, negotiate a price or allow you to buy at a stated amount over dealer cost, and arrange financing, insurance, even your trade-in.

Sam's Club directs its members to dealers who sell at a fixed amount over cost and promise not to haggle over price. Autoland, a California broker that buys cars for 600 credit unions, steers customers away from dealerships entirely. Buyers make all their arrangements, including financing and trade-in, through Autoland, which will even deliver the car to your home. Last year Autoland arranged the sale of 5,000 vehicles.

SUPERSTORES. New cars are still mostly sold through single-brand outlets the way home electronics were sold in the 1950s and 1960s. Been to a Sylvania or Magnavox store lately? Circuit City Stores, the consumer electronics retailer, figured it could adapt to cars some of the same techniques it uses to sell VCRs. Its CarMax lots hold up to 1,000 cars to make comparison shopping easier, and it has installed touch-screen computers to provide buying guides. Circuit City does not negotiate over prices, and promises its CarMax customers a five-day money-back guarantee. Says CEO Richard Sharp: "Between 10% and 20% of people like to negotiate. But the vast majority would prefer not to go through the pain and suffering. Besides, if you are going to run a straightforward business for the consumer, you have no other choice."

Circuit City originally planned to sell only used cars through CarMax. The company was concerned that tying itself to a new-car franchise would prevent it from giving customers a comprehensive choice of cars. But in January it negotiated an agreement to sell new Chryslers, Plymouths, Jeeps, and Eagles at a CarMax outside Atlanta. Both Chrysler and Circuit City say the arrangement is only an experiment. Still, says Chrysler executive vice president Theodor Cunningham, "I like the way they handle customers without high pressure." Two Korean manufacturers eyeing the U.S. market--Daewoo and Samsung--may distribute all their new cars through dealers like CarMax.

Nearly every executive in the auto industry has visited CarMax, which has four outlets in the Southeast and plans to open three more this year. Auto executives aren't the only ones worrying. A recent J.D. Power survey found that 70% of car dealers also see CarMax as a threat. With good reason: Customer satisfaction exceeds 90%, and except for the computer software, the concept is easy to imitate. Figuring that it's better to switch than fight, nine new-car dealers have joined to establish more than 100 high-volume used-car outlets similar to CarMax, called Driver's Mart.

ONLINE BUYING. More and more car buyers are doing their shopping electronically. The experience of George Chin, 43, a technical services manager in upstate New York, is typical. Using the Internet, he compared the specifications of various models and learned their retail and wholesale prices. Then he placed an electronic order for a Ford Explorer XLT with Auto-By-Tel, a computerized broker service. A few days later, he got a call from a nearby dealer, Bill Colb Ford, who filled the order for a fixed amount over the wholesale price and delivered the vehicle. Says Chin: "The whole experience was painless. There was no price haggling. No psychological pressure. No surprises."

Auto-By-Tel is the creation of a former California Ford and Chrysler dealer named Peter Ellis. When his idea for selling cars on QVC television didn't work out two years ago, he decided to retail them in cyberspace. Ellis took sites on established online services like CompuServe, as well as on the World Wide Web, to solicit orders from customers. He relays an order to one of 1,200 dealers, each of which pays Ellis between $200 and $1,500 a month for referrals. The margins on each sale are low (about $600), but so are the costs. By snagging their customer electronically, the dealers can cut their marketing expense from $400 a car to $30. In January, 12,000 potential car buyers logged on to Auto-By-Tel. "Ten years ago you needed branded outlets to sell computers because they were so complex," says MIT's Martin Anderson. "These days you can buy them through the mail. The same thing is going to happen with cars."

Electronic shopping has the potential to add enormous value to the buying process and reduce costs to a minimum. Manufacturers should be able to get accurate and timely data about consumer preferences that will enable them to schedule parts deliveries and production runs more sensibly. Even better, cars can be sold without building showrooms. "This is a very big opportunity," says A.T. Kearney consultant Jim Mateyka. "It takes out the guy who waltzes you around the showroom, takes out the long negotiation period, takes out a whole lot of non-value-adding functions. In theory, if I'm a dealer, I should give the customer a discount for taking the trouble to put together an order."

The auto industry, surprise, surprise, has been slow to grasp the power of the computer. Every manufacturer maintains a site on the World Wide Web, but the information posted there is less than you'd get in a brochure, and transacting business is impossible. Dealers won't list the cars they have in stock, much less the prices, for fear of providing valuable information to competitors. By keeping the potential buyer in the dark, they apparently hope to lure him into the showroom so they can disappoint him in person.

IF THE DEALERS are so bad, why has their system lasted so long? One reason is that dealers are independent businessmen protected by a powerful trade association and strong franchise laws. Says Thomas Wagner, head of Ford's sales and service: "Every time something came up, they circled the wagons and said they didn't have to do anything. But to be fair, sometimes we weren't listening." A second reason is that the car companies have been so preoccupied with fixing the rest of their operations-- manufacturing, product development, parts procurement--that they haven't paid much attention to distribution.

The current system was invented about the time Billy Durant founded Chevrolet in 1911. Early automakers couldn't afford to distribute their own cars, much less set up service networks to repair those primitive vehicles, so they authorized local businessmen to do it for them. Over the years, however, they made two mistakes that forever poisoned the new-car business. They put the dealerships too close together, ensuring that the dealers would cut each others' throats. And the automakers pushed the dealers to take cars they didn't want, thus forcing them to use clearance sale tactics. "The system is as bad as you can imagine it," says Louis Stern, a professor of marketing at Northwestern's Kellogg school of management. "I don't know a retailer of durable goods where the marketing is so unsophisticated and the sales process so unpleasant."

Squeezed by strong competition and weak products, dealers resorted to the abusive selling tactics that have become legendary. Once a customer (called an "up" in industry lingo because a salesman has to stand up to greet him) enters a showroom, the goal is to keep him there until a deal is closed. The worst thing that can happen is for the "up" to turn into a "be back" (for "I'll be back"), because he usually isn't, having gotten a better offer down the street. Some salesmen won't quote a price unless the customer promises to buy the car right then and there, or puts up a $100 deposit to demonstrate his "sincerity." Professional closers circle around the prospect to provide additional persuasion. If he has handed his current car over as a potential trade-in, he may find that the keys have been mysteriously "lost."

When a customer relaxes after settling on a price, he's really in trouble. The dealer will try to sell him an expensive extended service contract, shave the price on the trade-in, and provide a financing package considerably more expensive than one available from a bank or credit union. The dealer's goal is to create a total profit on the transaction of about $1,000 (on average, he gets a puny $10 on the car alone).

The first sign that change was badly needed appeared in the 1960s and 1970s. As Toyota and other Japanese manufacturers set up operations in the U.S., they discovered they could cover the entire country with 1,000 or so outlets, vs. the 3,000 supported by Ford. When they began selling luxury brands, they distributed the cars nationwide through no more than 300 outlets. The Japanese also quickly learned that if they treated customers like human beings rather than rats in a maze, business flourished.

SLOWLY Detroit began to catch on. When GM introduced Saturn in 1990, it limited the number of nationwide dealerships to about 300, which effectively eliminated comparison shopping. Saturn also tracks production carefully so dealers are not forced to sell more cars than customers can absorb. "We work hard to keep the market one car short," says marketing director Joseph Kennedy. Saturn dealers have been selling cars at a no-dicker price since the day they opened for business, and the brand's customer satisfaction ratings are among the highest in the industry.

Saturn started with a clean sheet. Other manufacturers will have to work dealer by dealer to transform the system. Chrysler has gotten a jump by opening a New Age dealership in Dallas. A customer entering the showroom has the option of bypassing the salesman entirely and heading straight for a computer terminal. There he can order a car, trade in his old one, and arrange financing. All the transactions are at a fixed price. If a computer can offer service like this, only a masochist would think of using a salesman.

As buying cars becomes more automated, it will eventually affect the way automakers design, order, and build them. The current system is grotesquely inefficient. Manufacturers try to figure out what models and options customers want months in advance, order the parts, build the cars, and ship them to dealers. When the cars arrive, they typically sit on the lot for 60 days before being sold. Most of the waste gets absorbed by the dealer, who must finance the cars in inventory and keep them in good repair.

Several automakers are experimenting with ways to ease the burden. In Britain, Rover ships its new cars to five regional distribution centers; dealers order the vehicles only after buyers make firm offers for them. Either the manufacturer or the dealer still has to pay for the inventory, but at least it is not held for long: Within three days, Rover sells and dispatches 80% of the cars from its centers. Although speedy distribution is easier to do in a small country like Britain than it is in the U.S., Cadillac is experimenting with a similar setup in Los Angeles, Phoenix, and the entire state of Florida. It tries to provide customers with a popularly configured car within a day. That's even faster than Rover, though Cadillac only offers certain model variations.

Ford, which now takes 60 days to fill an average customer order, aims to cut that in half within the next two years and reduce it by half again by 1999. If all goes well, it will be building cars to order in 15 to 20 days. Ford is trying to take small links out of every piece of the delivery chain. For instance, in pilot tests it has cut the average factory-to-dealer transit time from 12 days to seven by, among other things, breaking up railcar-size shipments into smaller loads.

Eventually a customer may be able to conduct an electronic auction, asking, say, all the Ford dealers in the Northeast to give him the price and availability of a particular Explorer-- delivered to his driveway, of course--and seeing how much they will pay for his trade-in. Then he could dial up the factory where his car will be built, schedule it for the production queue, and get a date for its delivery.

Dealers won't become extinct, of course. But for a change, neither they nor the manufacturer will be in control of selling a car. With all these new ways to buy, it will be the customer, finally, who's in the driver's seat.

REPORTER ASSOCIATE Rajiv M. Rao