My daughter is 13 and it is only this year have we started looking at more "up-market" bikes for her - a hardtail (still pretty cheap by hardtail standards) and for christmas, a good-quality BMX. I am still unconvinced that she is old/responsible enough to take care of them, but we'll see...
Up until then I have always gone down the "chain store" route. There are two main reasons for this: first, you have to be prepared for them to treat the bike like crap. And this is not just letting the bike drop without thinking, as Jilles says (although certainly this is true), but also things like leaving it out in the front garden, unlocked, on rainy nights to gradually rust or be nicked.
Second, kids will grow out of bikes, and probably a lot sooner than it will take the bike to fall apart, even if made by a chimp. So you're not necessarily looking for a "well made" bike, you're looking for a "well-enough made" bike. Sure, the better its condition the easier it would be to sell on, but you'll never get big bucks for a second-hand bike now that people have eBay and Craigslist available to them.
In the 5 - 7 age range I'd have thought the most important thing will be teaching them road sense and safety, so would have thought getting them used to peripherals such as hi-viz gear, a helmet and lights would be more critical than the bike itself. Bikewise maybe introducing them to a derailleur setup (we got a noddy 5-speed for my daughter at one point but she may have been older than 7) - obviously it is useful going forward for them to be familiar with this but also from my experience a kid will see a mountain where you or I would see flat road!
But certainly I wouldn't rule out "chain-store-quality" bikes because, like I say, you'll probably end up throwing it away eventually. Though of course you may prefer to shop at your lbs if you have an existing relationship with them (and you want them to stay in business).