Agree with the others that good storage is a must.
Small children just love the unwrapping (well mine did) and were just as happy to unwrap a teletubbies noo noo egg cup as they were to get a teletubby toy. As my children have birthdays in the run up to Christmas, they have always been mostly given things they need, with some luxuries and a few toys for good measure.
In my DC Xmas sack, over the years, they have got...
New pants / socks / vest / pjs / dressing gown / slippers - whatever they needed that year. Buy one with their favourite Character on, and they love it! They still request new pants now, only it's usually Victoria's secrets pants.
Nice foods. Eg Chocolate cereal. Got this idea off mumsnet years ago. As we don't buy chocolate cereal on a regular basis, they always get given a massive box at Christmas. My children are teens now, but they still insist on getting their chocolate cereal at Christmas. They also get bubble gum as I never let them have that when they were young (but older than yours), but "naughty Father Christmas" would insist and buy some every year! They still have it every year. Throw in a chocolate Santa etc...
Something for the bath - Bubble Bath, bath bombs, bath crayons and the like... something that gets used up! Magic flannels are great too.
Lots of arts and crafts bits, stuff that will get used up, and you can ask for more next year!
Some new clothes...
Bubbles (especially the giant wands), but they love even the normal bubbles.
Cake making kits. They love making cakes, esp if it's a cool character...
Then throw in a few toys for good measure... and you have a whole Christmas sack with lots of exciting things, but only actually adding two or three real toys into the mix.
As they get older, you can't do this so much, but it won't matter as their presents get smaller anyway - it becomes things like smiggle startionery, jewellery, things to decorate their rooms with, DVDs and computer games. Then you're spending lots on a very small pile!
With family, if they ask you what to get, encourage day trips out, theatre or cinema tickets, season passes to somewhere fun (eg a local activity farm), clothes and replenishables for their arts and crafts. Or club together for a big garden toy... (car, trampoline etc)