The objective of using either workflow would be to get DATA to PRESENTATION in an automated workflow. The finished presentation in either can virtually be identical. The important factor really relies on the format of the data. The assumption that XML comes out Excel is inaccurate, although you could edit XML in Excel, the source data most likely is generated from a system utilizing a markup language. The source data in a data merge, an element is simply defined by the placement within the structure (the column in a spreadsheet). Whiles tags define an element in the source data of a XML worfklow. Importing data for both processes require rules, data merge is the layout of variable placeholders, while XML rules include schema, DTD, etc.
Not to get to deep into the nuts and bolts, but a data merge worklflow would be typically used for creating a business card. A document that you may need a hundred unique files at one time. While a XML workflow would be used to create a report. A document that needs to preserve a format, content would be collected periodically, then produded with an automated process to generate the unique document.