A light tinkling bell sounds in Kompakt's offices, announcing lunchtime. The workers murmur happily as they file up to a spread of spaghetti and sun-dried tomatoes with a faintly boozy fresh fruit salad to follow. "They would just go out for junk food otherwise," says label manager Reinhard Voigt. "I need to keep them all healthy."

This daily meal, cooked by a visiting chef and paid for by management, is symptomatic of the communal spirit that has made this Cologne-based techno label a stable operation for 20 years, boldly weathering the pressures of a digital marketplace. Four out of the five label heads live in flats above the offices, and they all make music in the basement studios. A record shop occupies the ground floor, and as well as 500 releases on Kompakt and its sub-labels by around 150 artists, there's a thriving distribution business and booking agency. This is vertical integration done to the beat of a kick drum and it has produced a unique style of elegantly hedonistic techno that ranks amongst the most affecting dance music ever recorded.

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Wolfgang Voigt, the co-founder, calls Kompakt's style "beer techno", dance music that chats you up and is sick on your shoes, quite different from the stern, distilled "vodka techno" of Berlin. You can hear the hops in the playfulness of artists such as Justus Köhncke, Gui Boratto and Kölsch, who shares his name with Cologne's style of beer and local dialect. Their tracks pop out of the speakers clicking their heels, sensual and blissful productions that remain witty even at their most intoxicated. The label's 20th anniversary is being marked by compilations of its proudest moments, as well as a series of club nights across Europe this year, with one pencilled in for London in the autumn.

The operation began when Frankfurt record store Delirium asked Wolfgang and Jörg Burger to open a franchise in Cologne; the pair asked Wolfgang's brother Reinhard and his friend Jürgen Paape to help run it. Michael Mayer was waiting outside the shop when it opened on 1 March 1993. "My hopes were really high, but it was a massive disappointment when I finally got there," he says. "I saw two little crates of boring techno records. I was like, what are you doing? This is a huge opportunity. I slapped the newest list from the distributor on the table and started making crosses next to what they needed." He quit his university course and started working for them full time.

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For Wolfgang, dapper in a cravat even on a Thursday afternoon, this was the chance to "work professionally with that stuff you love the most: techno music". He was already 33 when the shop opened, and he and Burger had spent much of the 80s in thrall to literate UK pop such as Pet Shop Boys, Prefab Sprout and Scritti Politti. "But later it was Howard Jones, or a German variation like Modern Talking. It was time for something else. Acid house came in 1988, and we were blown away." Unimpressed by Madchester ("it was again four guys with guitars, and wide trousers – this was not so much my thing"), it was Detroit techno artists such as Underground Resistance that excited him next. "Then the big worldwide techno movement started. We used to say it's an international music language: we don't need pop stars any more, or any address, it doesn't matter if you come from New York, London or Berlin. It was very democratic."

Labels affiliated with the team were brought under one umbrella in 1998 and the outfit was renamed Kompakt, whose artists flavoured techno with the easygoing character of Cologne. "More and more we combined techno with our own ideas, which are more poppy, or funny," says Wolfgang. "Folk music, [naff German pop form] schlager, we brought everything in. We have always been in too good a mood for the Berlin guys." Kompakt also championed schaffel, a stomping, waltz-inflected beat inspired by glam rock.

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But there is melancholy too, and serenity, particularly on the Pop Ambient compilation series that Wolfgang describes as "pop under the microscope: beautiful, light, like flowers and dreaming". How do they marry the euphoria with the sadness? "It's connected, isn't it?" replies Mayer. "That's always been the idea of disco music, this tension-and-release dynamic. You need one so the other can shine – it's fantastic to get out of a sad period into the light, or the other way round, falling into a dark place."

Their overall sound was incubated in Studio 672, a tiny Cologne club that Mayer hosted his Total Confusion night at every Friday. "That was our living room for a long time, and a testing ground," he says. "We'd always start with ambient," he says. Sometimes we didn't play a single bass drum until 2.30am, in a packed club, just to keep the tension up until it was unbearable. Primetime was full-on techno, and the night ended with more melodic disco and pop-related things – Kylie Minogue was huge. All the genres Kompakt ventured into happened in this club, it cross-inseminated a lot of things."

Mayer also makes his own tracks, with his latest album Mantasy inspired by the adventurous spirit of Ferdinand Magellan, and spots new talent for the label – on the day I visit, he is giggling at a dreadful Russian trance-metal track. "Demos don't go to the trashcan," Justus Köhncke tells me. "They listen to almost everything and take it seriously. I would hear them complain: 'My God, we've listened to 10 hours of demos today.'"

If Mayer is the eyes of Kompakt and Wolfgang the brain, then Reinhard is the hands, looking after the bookkeeping and human resources. He also makes music, including a burst of recent activity with his brother. "Wolfgang always has so many things in his mind, and I have to talk a little bit like a teacher to him sometimes. But I can tell him whatever I want, he won't get pissed off." They fuel their studio sessions with beer, champagne and joints. "We have two big refrigerators of drinks in the basement – we don't have to go to the petrol station at midnight; we're always prepared. It keeps the mood working."

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Burger, meanwhile, is the ears, mastering and occasionally mixing Kompakt artists down in the basement. "If we were strong and weak in all the same ways, then we would hinder each other," he says. "Michael for the last years has definitely been the figurehead for the Kompakt label to the outside; Wolfgang is more like an artist, but has a lot of popstar potential." The shy Paape is the legs, managing the shop and tending his own brand of sweet-natured pop.

Together with the 20-odd staff recruited from among their trusted friends, they are a charming nonbiological clan, echoing the communes of previous German musical innovators such as Cluster or Amon Düül II. "I never wanted to have a job and go home and there's a wife and children – this was never my spirit and will never be," says Wolfgang, who is childless and whose girlfriend lives in a flat adjoining his. "I want to have liquid borders between living, between privacy and business, all under one roof. I always wanted to be in an alternative family."

A 2CD compilation, 20 Jahre Kompakt Kollection (Volume 1), is out now.