What I did was get some of those silicone bumpers that you put on the back of paintings and compressed the brake handle and stuck it on the inside upper part of the housing. When you release the brake/shift lever it limits how far it goes back into the housing and effectively reduces the reach on the brifters. There are now some companies that sell a purpose-made product that does the exact same thing. They come in several different sizes so you'll have to experiment with how large or small you need them to be. You also need to make sure you still have enough brake lever travel. I started my kids on flat bars with grip shifts as well, but with this modification they could use the brifters when they were 6-7 years old.
Regarding the front derailleur, they often don't have enough hand strength to shift chainrings but it's really not an issue. You can shift it for them if the need arises. With my kids I actually took off the 39 and 53's that came on the bikes and put something like a 46 or 48 on it. Just one chainring with a 12-27 cassette and that's all they needed. I guess if you live in a hilly area you can keep the 39, but my kids could climb like billy goats with the 46 or 48 and could also spin out and hit the high-20's as well.
Regarding shoes and cleats, I started my kids with MTB cleats and shoes and they learned in about 5 minutes when they were around 6 years-old as well. Road bike cleats required too much torque to get in and out and was almost impossible for them. MTB shoes are easier to walk in as well. Clipping in was one of the reasons they wanted to go riding all the time ;-)
Regarding shorts, the Trek kids' shorts are the best.
I've got tons of other kid-bike tips if you need them :-)
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http://irondad06.blogspot.com/
http://irondad.blogspot.com/