Wesfarmers managing director Rob Scott has thrown cold water over market expectations of an M&A binge, signalling an intention to redeploy freed up capital back into existing businesses like Bunnings and Kmart.

Speaking at the retail conglomerate’s annual strategy day on Thursday, Scott said he was not fixated on scale or growth for the sake of it and had no problems with running a smaller business that delivered better returns to shareholders.

“When it comes to allocating big licks of capital particularly in new businesses … what I’m reinforcing is that’s not the main game it’s the icing in the cake,” he said.

“We will explore [M&A] if we feel it delivers superior returns to shareholders, if not we will return the capital.”

Speculation has run rampant in recent months about what Wesfarmers will do with its capital after finalising a planned demerger of Coles supermarkets and divesting from its disastrous expansion of Bunnings into the UK and Ireland.

Citi analysts believe Wesfarmers will have at least $12 billion in its purse after Coles is spun off, but it appears the bulk of this will likely go back into Wesfarmers businesses or into the pockets of shareholders in the coming years.

“The most compelling opportunities that I see to generate significant returns from capital allocation reside in our existing businesses,” Scott said.

“These are not mature businesses, these are businesses that have a lot of runway ahead,” he said.

Doubling investment in tech, digital

Wesfarmers will be doubling its investment in new technology and data capabilities as its flagship businesses like Bunnings and Kmart prepare to bolster their omnichannel credentials.

Bunnings is preparing to expand the transactional aspects of its website, while Kmart is looking to increase the profitability of its own e-commerce business and improve customer analytics.

Read more from Wesfarmers’ 2018 strategy day:

• Target to close 20 per cent of selling space, target H&M, Zara.
• Coles to invest in new strategic direction.
• Kmart looks abroad to satiate growth aspirations.
• Bunnings charts e-commerce expansion.

It follows the creation of a digital and data unit within the Wesfarmers business earlier this year and the establishment of a larger and more focused business development team to help divisional directors to better realise cross-group growth opportunities.

More focus will also be placed on encouraging Wesfarmers’ divisional directors to pursue adjacent market opportunities, such as Kmart expanding into wholesale operations in Southeast Asia.

Asked why investors should be excited about holding Wesfarmers shares, Scott said that while investing in existing businesses over M&A may “sound a bit boring”, the various initiatives being undertaken would all add up into material benefits over time.

The flybys loyalty program emerged as a key example for Scott and looks set to form the cornerstone of efforts to Wesfarmers’ digital and data credentials.

Scott said that Flybys was a key reason Wesfarmers had decided to retain a 10 – 20 per cent stake in Coles once it was spun off.

He explained that Flybys was a “significant opportunity” for Wesfarmers that would ultimately add value to its retail businesses in the coming years.

It comes amid broader effort to up skill divisional leaders in best practice data analytics and digitally-enabled retail.

Wesfarmers was relatively tight-lipped on the specifics of the upcoming Coles demerger on Thursday but said an update would be provided before the release of its full year results for fiscal 18.

No problem with a smaller capital base

While Scott did not rule out any acquisitions, he reiterated repeatedly that Wesfarmers would be careful with what it pursues.

“We do not rely solely on M&A in order to deliver superior returns to shareholders,” Scott said.

“To undertake M&A I would say the outlook would need to be very compelling in order to justify investing a significant amount of capital on a significant investment.”

“We have no problem having a smaller capital base if that delivers better returns,” Scott said.

Potential acquisitions would likely include areas where Wesfarmers saw a market discontinuity that it could add value to, Scott said.

Scott also affirmed Wesfarmers’ commitment to realising value over 5-10 years, without too much emphasis being placed on first-year earnings per share or return on capital from any investments.

“Potentially we became a bit too short term focused on some things,” Scott conceded.

But while throwing cold water on purchase plans in the immediate future, Scott confirmed that the Kmart Tyre and Auto and Coles Hotels businesses were being reviewed, amid rumours they were on the market.

UPDATED 14:03 AEST

More to come.