Shower tiles are not a place to cut corners. If they are porous then you will have a host of issues. Basically you will breed mold faster and the tile install won't last as long - mold gets in cracks and pops tiles out or at least loosens bonding. You need to get a non-porous stone, plastic, glass, or porcelain.
If going with 12x12 tiles you will need at least 1/16th of an inch given they are uniform - and perfectly cut 12x12 are not cheap. So you are looking at 1/8-3/16. Which means you need sanded grout.
For cheap I suggest you go on craigslist or whatever is equivalent locally (even try job leftovers at tile store). The bottom 3 feet of your install needs to be a good tile - you will need about 34 sqft. You can get decent porcelain for $2 a sqft and even cheaper if it is a job leftover or end of stock. You can still use your ceramic up top. And when switching tiles I usually put in a narrow trim of glass mosaic in between - will need 3-4 sheets.
The tile and grout in an all tile shower are not waterproofing materials but long wearing easy cleaning finish ones. IF your shower was built properly it goes like this from top to bottom...
-The tile and grout laid in thin-set tile cement.
-A layer of portland cement or thin-set cement
-A thick rubber waterproofing membrane
-A layer of portland cement or thin-set cement
-Plywood subfloor
The two layers of cement with the waterproofing membrane sandwiched between them is what does all the work of carrying the water from your shower to the drain and keeping it out of the rest of your house. Hopefully this was done properly...It can be tough to know. If you're lucky and you somehow have easy access it is worth inspecting the subfloor and joists underneath the shower. If I inherited such a shower that was having problems I'd cut a small hole in the sheetrock or plaster from the ceiling beneath the shower if it was in the way and I'd have a look or I wouldn't be able to sleep at night. A leaky shower of this kind probably won't pour water all over the place (unless it's really bad...) but let it weep and drip slowly, silently doing damage. The only way to know for sure is to look. I think this should be done first before anything else so you know what you're working with before doing any repair work. If it's anything but dry under that shower you'll sadly want to be redoing the whole thing...or leave it and never use it again...
If it is nice and dry, you should be good to go to replace the grout. It's tough to say why grout fails, as many factors are at work: the quality of the grout, the consistency it was mixed to, the humidity and temperature on the day it was laid in, how well it was laid in, the mineral content and pH of the shower water, and the list goes on and on.
The surest way to repair grout is to replace it. This involves scraping it out by hand first. There are different shaped diamond tipped hand tools for just this operation that ease the process a bit. You want to get absolutely all of the crumbly stuff out of there, and then even sound grout you'll want to gouge out so it's at least half the thickness of the thickness of the tile, and more removed is better. A strong vacuum is a handy tool to have for this process so you can keep the area you're working on free of dust and see what you're doing. Once you're satisfied you can simply mix up some brand new grout and lay it in there. A fine grit grout should be used.
Though there is no complaint of loose or broken tiles in your question, another possibility with these showers is that the structural system (the joists and subfloor) are not doing their job properly and letting the tile and everything beneath them to the subfloor flex, causing cracks. I've seen a shower like this built atop a plywood subfloor whose joints did not land on floor joists (...) so the whole thing was unstable and had to be ripped out and redone after stabilizing the subfloor.
Good luck. These showers can be monsters...hopefully yours was built well and just needs the cosmetic refinishing of the grout.
Best Answer
Tile, grout, and cement products are usually porous and will leak. The standard practice is to place a waterproof layer under the tile in showers and baths. Sealing grout is usually done for stain resistance, not to create a waterproof surface in a shower.
At this point, there's no easy answer. You'd have to fix it by removing the tile and starting all over.