The foregone conclusion is that although most, if not all, version control systems, Mercurial included, does indeed work with binary files, they suck at diffing and merging them.
Word files are binary in nature. Yes, the latest incarnations of Office has switched to "Office Open XML" format, which includes XML, but they still wrap the entire thing in a zip file, which means it is still binary (and yes, I know that all files are in fact binary, you know what I mean.)
Now, many version control systems, both Mercurial and Subversion, can be told how to merge any file type it considers binary by giving it 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, diff them, and allow you to reconcile differences, then you're in business.
If you unzipped the Word file, and versioned the contents, then yes, you could get merge conflicts that you can resolve through Mercurial, however the contents would still be in a format that you didn't write yourself, so reconciling difficult merge conflicts might not be just difficult, they might be impossible.
In short, version control systems excel at storing binary files, but they suck at diffing and merging them.
If you never need to diff or merge, you can use Mercurial or Subversion or whatever, and it will work just great.