Creating multiple products groups within one ad group allows you to:
set different bid modifiers or negative keywords for your products
access a search term report for each product group
base each product group on a specific product attribute you choose
use a single maximum cost-per-click bid across your product inventory
This option will create one ad group and generate product groups based upon the product attribute you choose: Brand, Item ID, Custom label, Product type, or Google Product Category. You’ll also have the option to subdivide these product groups further by Item ID (unless you chose Item ID initially). This option may not be available for certain accounts.
Read more here: https://support.google.com/adwords/answer/6275304