Custom labels are a way to subdivide products into specific product groups in AdWords.
Explanation: With Shopping campaigns, you can use custom labels when you want to subdivide the products in your campaign using values of your choosing. For example, you can use custom labels to indicate that products are seasonal, on clearance, best sellers, etc.
Read more here: https://support.google.com/adwords/answer/6275295
Explanation: In a Shopping campaign, you subdivide your products based on existing data from the category, brand, item ID, condition, product type, and custom label attributes. You can use custom labels if you want to subdivide the products in your campaign using values of your choosing
Read more here: https://support.google.com/merchants/answer/188494