Your outermost <DataFolderElements
/> is responsible for writing the folders you see as Guids. Here is a quick 'how to':
1. You should replace this with <DataElements
Label="..." > - this will make your categories show
2. This will give you 'all products' inside 'all categories' - you want to limit this. You do this by filtering products, based on the category they are with in. If you uncomment the
<Filters /> markup in your xml and change the ParentType to
luffer.content.Category and the ReferenceFieldName to "Category" you should have products filtered according to their 'parent folder'
I'm guessing some of you type names here - also the 'Display='auto' may not be what you want etc. but I hope this helps anyway :)