Hello!
Product Groups allow you to have several products grouped together under one description and picture. This is useful if you would like to display a picture containing several items. For example, if you are selling bedding, you might have sheets, pillowcases and a bedskirt that go together. You can use the Product Grouping feature to associate all of these products under one picture that displays the products together. There are lots of other ways I have seen customers be creative with product groups!
Product groups appear at the top of the category they are associated with, above the product listing. Product Groups can also be a Homepage or Category special and are returned within search results. So there are some differences between product groups and subcategories.
Hope this helps!