The world's biggest food companies and household products makers face a selective return to consumer spending in 2010, testing their resolve to avoid promotions and suggesting more industry mergers to come.

Their strategies to cope with a slow and fitful recovery will be the focus of the Consumer Analyst Group of New York (CAGNY) meeting that begins next week in Boca Raton, Florida.

Starting on Tuesday, top executives from Kraft Foods , Procter & Gamble
, PepsiCo
and some two dozen other consumer products companies outline their plans to get consumers to buy more and keep costs down.

They are convening just two weeks after Kraft won control of British chocolatier Cadbury Plc in an $18.4 billion deal to create the world's biggest confectioner and drive growth through more exposure to emerging markets.

I think everybody's turning that deal into an expectation of more to come, but I think that's (just) an expectation, Sara Lee CEO Brenda Barnes said in an interview.

A year ago, food and household companies were benefiting from price increases taken in 2008 as commodity costs soared. But as consumers rely more on lower-priced store brands or spend less, manufacturers are under pressure to discount.

In the past few weeks, companies like ketchup maker H.J. Heinz Co and bread baker Sara Lee said they would increase spending on promotions for some products to regain market share.

By contrast, household product makers are pinning their hopes on consumers' loyalty to certain brand names and their eagerness to try new products. P&G is launching thinner, more absorbent Pampers diapers while Colgate-Palmolive is touting Speed Stick Stainguard deodorants.

P&G cut prices on about 10 percent of its portfolio over the last year, but that only impacted 1 percent of total sales.

We're not fixated on cutting price. I don't want to grow by cutting price. I want to grow by investing in innovation, P&G Chairman and Chief Executive Officer Bob McDonald said in an interview. I think that's the way you grow long term.

Coca-Cola Co , the world's largest soft drink maker, hopes to whet consumers' appetites with high-tech fountain dispensers offering more than 100 drink combinations and new packages such as mini cans and cold bottles for 99 cents.

PepsiCo Chief Executive Indra Nooyi said on Thursday that her company was working on breakthrough beverages for the sagging North America market, but declined to give details.

Food, drink and household product companies largely trailed the broader market over the past year, with the Standard and Poor's 1500 Packaged Foods index <.15GSPFOOD> up 23.5 percent, compared with a 30.4 percent increase for the S&P 500 <.SPX>.

The Dow Jones U.S. Beverages index <.DJUSBV> is up 30 percent, while the S&P Household & Personal Products Industry Group index <.GSPHHPE> has climbed 23.8 percent.

MORE MERGERS?

Companies used aggressive cost cutting campaigns to help boost profits in past years. They were also cushioned by falling prices for commodities like wheat and energy in much of 2009.

Analysts and executives are now bracing for a return of commodity inflation that could force more merger activity.

I think you could well see consolidation in the industry, Kellogg Co CEO David Mackay said in a recent interview.

In an environment of tepid sales growth, those who don't have the ability to manage their cost base to keep investing in their business, are probably going to struggle, Mackay said.

Barnes is expected to announce at CAGNY how Sara Lee will spend proceeds from recent divestitures, with analysts saying that could result in a big stock buyback or dividend increase.

Kraft, meanwhile, is scheduled to report fourth-quarter earnings on February 16. Later that day, Hershey Co will likely be peppered with questions about its own international plans after failing to put forth a competing bid for Cadbury.

PepsiCo is weeks away from buying the remaining stakes in its two largest bottlers, Pepsi Bottling Group Inc
and PepsiAmericas Inc
, that it does not already own, giving it greater leverage in North America.

Pepsi and Coke each plan to talk about international operations, which helped drive fourth-quarter growth, at CAGNY.

(Reporting by Brad Dorfman and Jessica Wohl; Additional reporting by Martinne Geller in New York; Editing by Michele Gershberg, Phil Berlowitz)