What does Kato Custom Shop actually do?

It's basically like some of the services offered by your local hobby shop, like where you'll see a sign advertising how they'll add micro trains couplers or install DCC on your model for a fee. They're offering the services of a "professional" modeler for those who may not be up to tackling them.

The Kobe custom shop is the same thing, only offered directly by the manufacturer, using their own inventory, and with a much more standard set of services and prices. In addition to offering the installation of detail parts, alternative couplers, lighting and DCC on a wide range of factory new Kato models, they also have a few "Kobe exclusive" models. These are souped up versions of regular Kato models, that are upgraded by hand to order. For example Kato offers a maxed out DCC version of the classic Kato Mikado which adds hand installed parts like a lit fire box and DCC controlled coupler.

In all cases you place an order with Kato, specifying what you want done on what model, and Kato will have one of their Kobe staff get that model from inventory, do the work, and when its down have it delivered to you.