It is a large cave that has a large round stone covering the entrance. Inside there are hollowed out shelves where she stores and displays her discoveries.
After finding unusual objects throughout exploring places like sunken ships, caves and even sometimes above the surface, she puts them in a small pink shoulder bag and takes them back to store in her grotto. The Dinglehopper (fork) is one notable object.
Ariel has collected many things, each representing a special memory, adventure, all to remember the good times. She calls them her gadgets, gizmos, whosits, whatsits and thingamabobs.
She had two collections stored there: The first one was started by her, after she learned to not be terrified of humans. She also used it to keep Eric's family photo album.
It ended up being accidentally discovered by Sebastian who was keeping a watch on her at the time (and presumably started up again without Sebastian's knowledge, based on his reaction to the collection) and then destroyed by King Triton when he was angry with Ariel upon learning that she rescued and fell in love with a human, especially when he saw she had a statue of him there as well. However, he becomes horrified and regrets his actions, leaving a weeping Ariel on her ruined grotto in shame. He later returns to find Ariel gone to search of Ursula the sea witch and orders a search for her to apologize at what he had done.
Later on, after the events, Ariel takes Eric there to show him the grotto, making him the 5th person to know about it.