I'm not a mail merge expert and this looks like it doesn't align with my idea of how a mail merge works.
You could explore the functionality offered by
Graham Mayor's 'Merge Many to One' addin which should be able to at least do the steps 1 & 2. The step 3 might also be possible with that tool if your input data is sorted correctly.
If you can't get it working with the ManyToOne approach, you could consider using a macro to compile the output reports or another software package like Microsoft Access.
1. Does this have to be in Microsoft Word?
2. Are you able to use macros to produce the report?