To color up is to exchange a large number of poker chips for a smaller number of chips of a higher denomination, but of course keeping the total value of the chipstack the same.
This is typically done when a player has had a good session and has won a lot of chips at a table. The number of chips in front of the player may be uncomfortably, or even unmanageably, large. In such cases, other players may suggest (and even dealers may occasionally suggest) that the player color up a portion of their stack into larger-denomination chips. This can keep the game running more smoothly (if the player with the large stack was slowing down the game due to their chipstack), and can also decrease the intimidation factor of seeing a player's large chipstack. Some good players even prefer to do this to lull the opposition.
Note that under the rules of table stakes, a player is not allowed to remove chips from the table, which is why coloring up is often the only method for reducing an overly large stack of chips into something more manageable.
Coloring up is also sometimes done when a player is preparing to leave the table and cash out their winnings. It is much easier to walk to the cashier's cage with a handful of $100 chips than to precariously balance eight or ten racks of a hundred one-dollar chips each.
Occasionally, at smaller rooms, coloring up is done at the request of management, if the dealer or cashiers are running low on small-denomination chips.
In some rooms, coloring up is not permitted, since if it is done frequently, coloring up can slow down the game (usually the process of coloring up itself does not slow the game, but if the player continues playing and ends up losing enough that they need to make change for their newly-acquired larger-denomination chips, some rooms feel this is a lot of time-wasting make-work for the chip runners, and do not allow it).
In large tournaments coloring up is mandated at regular intervals, often at the start of scheduled breaks. As a rule, only denominations as small as necessary to post the ante are allowed to remain in a tournament, as the antes increase any denominations that become smaller than necessary for play must be colored up. As coloring up occurs, the smaller denomination chips will be removed from play.