The previous conclusion is that although most, if not all, of the version control systems included in Mercurial do work with binary files, they suck and distinguish between them.
Word files are binary. Yes, recent incarnations of Office have switched to the "Office Open XML" format, which includes XML, but they still transfer the whole thing to a zip file, which means it's still binary (and yes, I know that all the files are in a binary fact, you know what I mean.)
Now many version control systems, both Mercurial and Subversion, can be told how to combine any type of file that it considers binary, providing it with an external merge tool that can do the job.
This basically means that if you can find a program that can take two Word files, distinguish them and let you reconcile the differences, then you are in business.
If you unzipped the Word file and updated the content, yes, you can get merge conflicts that you can resolve through Mercurial, but the content will still be in a format that you yourself don’t write, so merge conflicts can be not just complicated, they can be impossible.
In short, version control systems excel at storing binary files, but they suck and distinguish between them.
If you never need to delimit or merge, you can use Mercurial or Subversion or something else, and that will work just fine.