'Item Classification' is a new introduction for ERA 2.x and can be thought of as a 'Sub-department'. When grouping PLU items into groups, the previous choice was only to put them in a 'Department'.
'Item Classification' introduces another layer of grouping below Department into which you can place products. This feature is very useful and important for Mix & Match offers as it allows you to make sub-sets of products the target of an offer even if they are in different Departments.