"It's not a time to panic but, at the same time, there has to be significant change to get where they want to be in Tokyo," Hoy, who is Britain's joint-most successful Olympian alongside current sprinter Jason Kenny with six golds, told the BBC.
"There are some positive things to take away but, on the whole, I think it was a bit of a shock."
With Hoy leading the way, Britain turned itself into a track cycling powerhouse with massive financial input and a track programme that was the envy of the world.
In the last five Olympics Britain's track cyclists have scooped up 40 medals, 24 of them gold. In Rio they won six golds, and in London four years earlier they managed seven.
While Britain's performance director Stephen Park pointed to the fact that they will have new bikes for Tokyo and the team is "not a million miles away" from where it wants to be, Hoy believes they have "plateaued".
"British Cycling is certainly not dominating in the way it used to, but they're not underperforming. It's that the world has moved on, that is the bottom line," he said.
"Every generation raises the bar. Every generation learns from the previous one and the times get faster and faster.
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"What's different is that Britain have always been the ones doing the raising of the bar, they're the ones improving before the rest of the world then responds.
"It feels like we have plateaued. There hasn't been this rate of improvement we have traditionally come to expect."
Hoy's point was illustrated perfectly in the men's team pursuit -- the event in which Britain has dominated, winning the last three Olympic titles.
Britain's quartet, which failed to win a medal, clocked 3:50.341 in the qualifying run and 3:51.561 in their round one ride against Germany. Their world record in Rio four years ago was 3:50.265. Australia lowered the mark to 3:48.012 in 2019.
Denmark took massive chunks out of it in Berlin, however, breaking the record in all three rides, the last of which earned them gold in 3:44.672.
In reality, Britain's quartet, led by three-times team pursuit Olympic champion Ed Clancy, need to find at least six seconds in the next five months.
New bike or not, that is a tough ask.
"Am I going to sit here and say (the new bike) will give us three and a half seconds or seven seconds or whatever in a team pursuit? No," Park said.